Question

5-1 Rate of return Douglas Keel, a financial analyst for Orange Industries, wishes to estimate the rate of return for two similar-risk investments, X and Y. Keel's research indicates that the immediate past returns will serve as reasonable esti- mates of future returns. A year earlier, investment X had a market value of $20,000, investment Y of $55,000. During the year, investment X generated cash flow of $1,500 and investment Y generated cash flow of $6,800. The current mar- ket values of investments X and Y are $21,000 and $55,000, respectively. a. Calculate the expected rate of return on investments X and Y using the most recent year's data b. Assuming that the two investments are equally risky, which one should Keel recommend? Why?

Answer 1

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- 2x Σ AutoSum : A Insert Delete Format Fill 2 Clear Sort & Filter Editing Find & Select Cells DL DM D N NPV, IRR, PBP,OCFINDEX - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Calibri 11 A A = = = V Wrap Text General Ea Copy Paste B I U B- SF A Merge Merge & Center - Center $ -% Format Painter % 4:0 .00 . Conditional Format Cell Formatting as Table Styles Clipboard Font Alignment Number Styles DM95 Fax DE DE DG DH DI DJ DK 91 92 INVESTMENT X PO = 20000, D1 = 1500, P1 = 21000 93 EXPECTED RATE OF RETURN = (P1+D1-PO)/PO 94 EXPECTED RATE OF RETURN = (21000 + 1500 - 20000)/20000 95 12.50% 96 97 INVESTMENTY PO = 55000, D1 = 6800, P1 = 55000 98 EXPECTED RATE OF RETURN = (P1+D1-PO)/PO 99 EXPECTED RATE OF RETURN = (55000 + 6800 - 55000)/55000 12.36% 101 IF RISKS ARE EQUAL 103 THEN WE SHOULD PREFER INVESTMENT WITH HIGHER RETURN 104 SO WE SHOULD GO FOR INVESTMENT X 100 102 105 106 107 108 109 N Rea K FCFARM, MSI,confidenceINDEX CURRENCY LOAN CROSS OVER HEDGING MONEY MARKET GM HPR AM TAX GROWTH SUST I OCF CASH FLOW STATW ferences PREF AND DIV POLICY BOJ 130% 0 + 2. B 9 . * ENG 28-11-2019