Question

Jose decides to open a restaurant. After analyzing costs and forecasting revenue he realizes he can earn about a 14% return on his investment. What factors must Jose think about in making his decision?

Justin has saved 50,000. He can invest it in a real estate venture that will pay 15% for 10 years, and then in a mutual fund for an additional 10 years at a 9.75 annual return. He’s hoping that in 20 years, when he is 40, he will have enough money to pay for his child’s college education, estimated at about $75000 per year. Will he have enough?

Microsoft Corporation decides to invest in developing a robot that will help the elderly with tasks such as putting on socks, eating, etc. The initial investment for this project is $52,000,000 (52M). The cash flows expected from this investment are 28 million in year 1, 19 million in year 2, 23 million in year 3 and 18 million in year 4. What is the Net Present Value of this project? Would this project be a good investment? Or would it be better to invest $52M in a bond paying 8% annually?

Answer 1

a)

For the case of Jose, to make a decision he will have to compare his investment first to the risk free rate and then to returns from investments of similar risks. For example, let us assume that Jose can make a risk free rate of 10% investing in treasury bills. Now, he knows that the restaurant business offers a better return than the risk free rate, however it comes with its own risks. Suppose that for similar risk, he earns lower rates of returns from other investments( for eg: Stocks, Commodities etc) he can take a decision about investing in the restarant business.

b)

Data is insufficient. Please provide the education years of the child.

c)

Initial Investment of project = $ 52 M

CF1 = $ 28 M

CF2= $ 19M

CF3 = $ 23M

CF4 = $18 M

NPV = -52 + 28/1.08 + 19/(1.08)^2 + 23/(1.08)^3 + 18/(1.08)^4 = $ 21.7 M

IRR of the investment = 27%

As the bond is paying only 8%, the project is a good investment and NPV is also positive.