A parcel of land costs $500,000. For an additional $800,000 you can build a motel on the property. The land and motel should be worth $1,500,000 next year. Suppose that common stocks with the same risk as this investment offer a 10 percent expected return. Would you construct the motel? Why or why not?
2006-07-26 12:10:24 · 5 answers · asked by Cbauer 2 in Business & Finance ➔ Investing
that actually depends on you lead time required to construct the motel. your yield will go down the longer your construction/planning period would be.
2006-07-26 13:15:40 · answer #1 · answered by J 4 · 0⤊ 0⤋
Yes of course you would construct the motel as the return is on your investment is 15.34%((1,500,000 -800,000- 500,000)/1,300,000) compared to the 10% you would have with the stocks.
2006-07-26 12:36:51 · answer #2 · answered by rajatharjani 4 · 0⤊ 0⤋
If it is one year perspective, both the options of stocks or motel does not sound good.
If it is 10 years, then I would go with stocks.
2006-07-26 14:39:45 · answer #3 · answered by Anonymous · 0⤊ 0⤋
employing the CAPM... E(R) = Rf + B(Rm-Rf) the place: E(R) = expected return Rf = risk-loose cost B = Beta Rm = industry risk So i'm assuming that Rf on your occasion is 3.7%. E(R) = 3.7 + a million.3(14.7-3.7) so E(R) = 18% desire that ideas your question.
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2006-07-26 15:30:43 · answer #5 · answered by Andy 1 · 0⤊ 0⤋