You are thinking about investing $ 4 comma 650 in your friend's landscaping business. Even though you know the investment is risky and you can't be sure, you expect your investment to be worth $ 5 comma 637 next year. You notice that the rate for one-year Treasury bills is 1 %. However, you feel that other investments of equal risk to your friend's landscape business offer an expected return of 9 % for the year. What should you do?

Question

Business

Douglas Wood

5 November, 00:00

You are thinking about investing $ 4 comma 650 in your friend's landscaping business. Even though you know the investment is risky and you can't be sure, you expect your investment to be worth $ 5 comma 637 next year. You notice that the rate for one-year Treasury bills is 1 %. However, you feel that other investments of equal risk to your friend's landscape business offer an expected return of 9 % for the year. What should you do?

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Answers (1)

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Castro · Answer 1

The computation of present value of the return is shown below:-

Present value of the return = Expected return : (1 + r) ^n

= $5,637 : (1 + 0.09) ^n

= $5,637 : (1.09) ^1

= $5,637 : 1.09

= $5,171.56

Since as we can see the present value is more than the investing amount. So, the investment can be done in this project.