Question

Imagine the following scenario where you need to decide which MUTUALLY-EXCLUSIVE project to pursue: You are given $50,000 to invest in one of the following two projects (you CANNOT invest in both). 200-500 words

Project A: A highly respectable local entrepreneur reaches out to you for a short-term loan of $10,000 guaranteeing a return of $16,000 in 15 days ($6,000 of profit). The situation is unusual as her customers lost their financing source and will need about 2 weeks to wire her the money. Everything is insured and guaranteed so there is ZERO risk of losing your money if you decide to give her the loan.

Project B: A large local utility company sells community bonds with a minimum of $50,000 and promising 15% interest at the end of one year. Calculate the annualized return for project A. Which project (A or B) would you invest in? Why?

Answer 1

Project A :

Return = $6000/$10000 = 60% in 15 days

So, Annualised Return = 60%/15*365 = 1460% p.a.

Project B :

Return = $50000 *15% = $7500 in one year

Annual Return = 15%

So, in terms of Percentage Return, Project A is much ahead of project B

However the total profit at the end of the year is higher in B ($7500 as compared to $6000)

As nothing else is given regarding reinvestment of proceeds from A into any other project or so on and also the discount rate (required rate of return) is not given, one can make decision based on IRR

So, I would go with Project A and after 15 days will look out for another opportuity to invest funds for the remaining 350 days, Generally , even if one keeps the money in savings account earning say 3% One would have $50000+$6000 = $56000 invested and return on it would be $56000*3%*350/365 = $1611 which makes the total return (6000+1611 = $7611) higher than that in Project B.

(PS one can also argue that since project B gives higher total profit , one would go with project B)