Question

to take advantage of the higher yield? Exercise 3.10 Compare investment alternatives You have accumulated $25,000 and are looking LO 2 for the best rate of return that can be earned over the next year. A bank savings account will pay 3%. A one-year bank certificate of deposit will pay 6%, but the minimum investment is $30,000. Required: a. Calculate the amount of return you would earn if the $25,000 were invested for one year at 3%. b. Calculate the net amount of return you would earn if $5,000 were borrowed at a cost of 12%, and then $30,000 were invested for one year at 6%. c. Calculate the net rate of return on your investment of $25,000 if you accept the strategy of part b. d. In addition to the amount of investment required and the rate of return card, what other factors would you normally consider before making a comment decision such as the one described in this exercise? Exercise 3.11 ROI analysis using the DuPont model

Answer 1

A-	future value of investment	present value*(1+r)^n	25000*(1.03)^1	25750
	amount of return you will earn	future value of investment-principal Invested	25750-25000	750
B-	future value of investment	present value*(1+r)^n	30000*(1.06)^1	31800
	cost of borrowed fund	amount borrowed*interest rate	5000*12%	600
	net amount of return	future value of investment-principal amount invested-cost of borrowed fund	31800-30000-600	1200
C-	net rate of return on your investment of 25000	net amount of return/value of investment of 25000	1200/25000	4.80%
D-	other factors considered for Investment are (1) compounding rate of interest (2) risk associated with the investment (3) safety of investment (4) liquidity of investment (5) Marketability of Investment