Question

1) You have the opportunity to invest $10,000 in one of two investments. The first investment would pay you either $9,500 or $12,500 at the end of one year; the second investment would pay you either $8,500 or $13,500 at the end of one year.Which investment would you choose and why?

2) A venture recorded revenues of $5 million last year and net profit of $750,000. Total assets were $3,000,000 at the end of last year. Calculate its net margin, asset turnover and return on assets.

Answer 1

1) If I have the opportunity to choose between one of these two investments then I would like to choose the first investment where I invest $10,000 and in return I would get the payment of either $9,500 or $12,500 because when someone invest his/her money he/she aims to get money that is more than his/her investment (in addition to interest) which is called profit. No one wants to face the loss for their investments.

In the first case if there is profit occurs then there will be a chance of $2,500 profit and if in case loss occurs then only $500 loss which is somehow very less.

And in the second case if there is profit occurs then there will be a chance of $3,500 profit but if in case loss occurs then $1,500 loss which is a big loss.

When we invest money we hope that there will be some profit but if we face loss then that would be a great adverse effect on investment and in the first situation there is less loss so I choose first option as the best .

2) Revenues=$5million or $5,000,000

Net profit=$750,000

Total assets=$3,000,000

So, Net margin=Net profit/Revenues

=$750,000/$5,000,000=15%

Asset turnover=Revenues/Total assets

=$5,000,000/$3,000,000=1.666 times

Return on assets=Net profit/Total assets

=$750,000/$3,000,000=25%