You are thinking about investing $5,022 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 $5,615 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 10% for the year. What should you do?

You are thinking about investing $5,022 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 $5,615 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 10% for the year. What should you do?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Jerry owns a restaurant and has the opportunity to buy a high-quality espresso coffee machine for $5,000. After carefully studying projected costs and revenues, Jerry estimates that the machine will produce a net cash flow of $1,600 annually and will last for five years. He determines that an interest rate of 10% is an adequate return on investment for his business. Calculate the present value of the machine to Jerry. Based on your calculation, do you think a decision to purchase the machine would be wise?
A rich, friendly, and probably slightly unbalanced benefactor offers you the opportunity to invest $1 million today in two mutually exclusive ways. The payoffs are: $2 million after 1-year, a 100% return; or $300,000 a year forever. Neither investment is risky, and safe securities are yielding 7%. Which investment should you take? You can’t take both, so the choices are mutually exclusive. Should you want to earn a high percentage, or should you want to be rich? Applying the net present value method and the internal rate of return method should help to guide you in your decision. And, the present value of a perpetuity is equal to the cash payment divided by the interest rate. Earn a high percentage. Be rich.
You are considering a safe investment opportunity that requires a $1,410 investment today, and will p $780 two years from now and another $830 five years from now. a. What is the IRR of this investment? b. If you are choosing between this investment and putting your money in a safe bank account that pa an EAR of 5% per year for any horizon, can you make the decision by simply comparing this EAR wit the IRR of the investment? Explain. a. What is the IRR of this investment? The IRR of this investment is %. (Round to two decimal places.)
David Rubin has $100,000 to invest over 5 years. David is very risk-averse and has a target average return of 4% per year for his investment over the next 5 years. He is looking at investing his money in the 3-month US Treasury Bill, which currently yields 4% per year. What are the pros and cons of David investing in this 3-month T-Bill in the context of his risk-proflle and his investment objective? If a company's beta were to double, would its expected rate of return double? Explain your answer. Using the five components of a nominal interest rate, explain why a US corporate bond's yield-to- maturity (YTM) is always greater than the YTM of a US Treasury bond of similar maturity.
Please provide solutions to the following problems: You receive a cash bonus, but your employer gives you two options: receive $8,000 right now or $10,000 two years from now. Assuming an interest rate of 12% what would be the best option. Show all calculations. Find the future value of $500 in 6 years at 9%. What is the present value of an investment that will generate $300 per year for 15 years at 6%? If your grandparents decide to give you $30,000 when you complete your degree what might you offer to them today as an amount as opposed to waiting the 4 years (assume a 5% interest rate). Calculations must be shown for full credit. Also they help in awarding partial credit at the instructors discretion. If using formulas, a financial calculator, or online calculator is used, what value is entered for each variable must be given. If Excel is used the spreadsheet with the formula must be submitted.
Your startup has been doing well and you think you’re just a couple of years away from an M&A exit event. You assume you’ll be able to sell the company for about $50mm, the industry average. But you need to raise $3mm now to fund you until then. You’ve received three term sheets, all with the same premoney valuation of $9mm: which one is best, from the standpoint of maximizing the amount of money you will receive from the target exit, and what key reason(s) makes this most favorable? VC Firm: 1.5x participating preferred, no cap Angel Group: Convertible debt, converting at 25% discount to exit value, $18mm conversion value cap Family Office: 3x simple preferred with a $15mm cap
A potential client comes to you and asks you to help him pick some stocks and that we wants his investments to earn at least 10% guaranteed annually. He also doesn’t understand why you want him to invest in a variety of asset classes. How would you explain the importance of diversification to him and what would you say in response to his request for a 10% guaranteed annual return on his investment?
You are thinking about investing $4,953 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 $5,650 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 10% for the year. What should you do? The present value of the return is $ (Round to the nearest cent.)
You are just starting your first job out of college. You and your best friend are competing to see who will have more in their savings when you retire; you both plan to retire at age 52, just 30 years out. You will need $5 million to retire. If you average an annual return of 7% on your investment, how much do you need to put into retirement savings on an annual basis?

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