Hide student question Issue #11: Comparison of Returns on $200000 and 5.5% on$70,000 Investors, as reasonable economic creatures commit toinvestment portfolios with the expectation of earning valuable returns. Keon as a logical investor believes his investment should provide the best value of rewards and is considering which option to invest in. The expected returns should be something similar or equal to his historical gain of 9% per annum. If Keon should leave $70,000 in the safe investment , his only expected return will be $3,850 (70,000*5.5%) in nominal terms per annum. However, if he invests the $200,000 by going entrepreneurial, Keon can potentially make a significant gain as per below. Return on Investment (ROI) ROI = Net Income * 100 Cost of Investment Cost of investment = $200, 000 Cost of 1 Limousine = 80,000 Total Cost of Limousines = (80,000*4) = 320,000 Useful Life of 1 Limousine = 20 yrs Depreciation per year = 80,000 = 4,000 20 Total Depreciation = 16,000 (4,000*4) Depreciation for 6 years = 96,000 (16,000*6) Net Book Value of the vehicles = 224,000 (320,000-96,000) Net Profit=24,000 (224,000-200,000) ROI =12% (24,000/200,000) In contrast, Keon is advised to invest 200,000 in the Limousine since its 12% return per annum is approximately 120% more than investing in the portfolio with 5.5 Is this comparison perfect? if not plz help me in this.
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Issue #11: Comparison of Returns on $200000 and 5.5% on$70,000
Investors, as reasonable economic creatures commit toinvestment portfolios with the expectation of earning valuable returns. Keon as a logical investor believes his investment should provide the best value of rewards and is considering which option to invest in. The expected returns should be something similar or equal to his historical gain of 9% per annum.
If Keon should leave $70,000 in the safe investment , his only expected return will be $3,850 (70,000*5.5%) in nominal terms per annum.
However, if he invests the $200,000 by going entrepreneurial, Keon can potentially make a significant gain as per below.
ROI = Net Income * 100 Cost of Investment
Cost of investment = $200, 000
Cost of 1 Limousine = 80,000
Total Cost of Limousines = (80,000*4) = 320,000
Useful Life of 1 Limousine = 20 yrs
Total Depreciation = 16,000 (4,000*4)
Depreciation for 6 years = 96,000 (16,000*6)
Net Book Value of the vehicles = 224,000 (320,000-96,000)
Net Profit=24,000 (224,000-200,000)
ROI =12% (24,000/200,000)
In contrast, Keon is advised to invest 200,000 in the Limousine since its 12% return per annum is approximately 120% more than investing in the portfolio with 5.5
Is this comparison perfect? if not plz help me in this.
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