Question

You are thinking about investing

$4,892

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

$5,761

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

8 %

for the year. What should you​ do?

The present value of the return is?

ROUND TO THE NEAREST CENT

Answer 1

Other investments of equal risk to your​ friend's landscape business offer an expected return of 8 % for the year.

So required return on this risky investment (i) =8%

Present value of investment at today date is equal to investment that is =4892

Worth in 1 year (future value )= 5761

Present value of cash inflow = (future value/(1+i)^n)

=5761/(1+8%)^1

=5334.259259

net present value or Present value of return = Present value of cash inflow - present value of investment

=5334.259259-4892

=442.259259

So present value of return is $442.26

It is positive. So we should accept the project