Question

You have invested in a business that proudly reports that it is profitable. Your investment of $ 4 500 has produced a profit of $ 296. The managers think that if you leave your $ 4 500 invested with​ them, they should be able to generate $ 296 per year in profits for you in perpetuity. Evaluating other investment​ opportunities, you note that other​ long-term investments of similar risk offer an expected return of 7.6 %. Should you remain invested in this​ firm?

The expected return of your investment is ​%.

Answer 1

Return on the given investment is calculated below:

Initial outlay = Annual cash flow Interest

296 4,500 = 1 Interest

296 Interest = 4,500

Interest = 0,06578

Return on investment is 6.578%.

Return on other investment with same risk is 7.6%. Thus, one should not remain in the given investment.