You are thinking about investing $ 4520 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 comma 617 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?

please refer to the explanation section

Explanation:

investment = $4520

expected investment value = $5617

there expected return = (5617 - 4520)/4520 = 0.242699115

there expected return = 24.27%

return from risky investments= 8%

Risk free treasury bills rate = 1%

the investment Value expected is 5617 which represents a 24.27%  required rate return

investing in Landscaping business will yield a return of 8% while investing in treasury bill will yield 1% both investments returns are less than the 24.27% expected rate of return.

I would not not invest in the landscaping business

I will not invest

Explanation:

From the question, there are two investment opportunities as follows:

1. To invest in my friends landscaping business and obtain an expected return of 8%  offered by other investments of equal risk.

2. To invest in one-year Treasury bills and obtain a return of 1%.

Therefore, my decision will be based on which of the two above offer a higher rate of return than my expected return. If none of two return is higher than my expected return, I will not invest in either of the two.

Computation of my expected rate of return (MERR):

MERR = [(Worth of investment - Investment cost) ÷ Investment cost] × 100

MERR = [($5,617 - $4,520) ÷ $4,520] × 100

          = [$1,097 ÷ $4,520] × 100

          =  0.242699115044248  × 100

          = 24.27% approximately.

Decision:

Since both the 8% expected return from my friend's landscape business and 1% expected return from one-year Treasury bills are lower than my 24.27% expected return, I will not invest in any of my friend's landscape business and one-year Treasury bills.

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