Question

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. ​ Douglas's research indicates that the immediate past returns will serve as reasonable estimates of future returns. A year​ earlier, investment X had a market value of $27,000​; and investment Y had a market value of $61,000. During the​ year, investment X generated cash flow of $2,025and investment Y generated cash flow of $6,757. The current market values of investments X and Y are $28,818and $61,000​, respectively.

a.  Calculate the expected rate of return on investments X and Y using the most recent​ year's data.

            The expected rate of return on investment X is __​% (Round to two decimal places)

The expected rate of return on investment Y is __​% (Round to two decimal places)

b.  Assuming that the two investments are equally​ risky, which one should Douglas​ recommend? ​ Why?

b.  Assuming that the two investments are equally​ risky, which one should Douglas​ recommend? ​ Why?

Answer 1

Investment X      
Market value Before one year (Opening value)   27000  
Current Market value (closing price)   28818  
Cash flows received   $2,025  
      
Expected rate of return formula = ( closing price-Opening price+cash flow received)/Opening price *100      
(28818-27000+2025)/27000*100      
      
14.23%      
      
Investment Y      
Market value Before one year (Opening value)   61000  
Current Market value (closing price)   61000  
Cash flows received   $6,757  
      
Expected rate of return formula = ( closing price-Opening price+cash flow received)/Opening price *100      
(61000-61000+6757)/61000*100      
      
11.08%      
      
So Expected return of X is   14.23%  
Expected return of Y is   11.08%  
      
If investment are equally Risky, investment having Higher Expected return will be recommended      
      
So investment X must be chosen