Rate of return?

Question

Douglas Keel,a financial analyst for Orange Industries,wishes to estimate the rate of return for two similar risk investments X and Y .Keel,s research indicates that the immediate past returns will act as reasonable estimates of future returns.A year earlier,investment X generated cash flow of $1,500 and investment Y generated cash flow of $6,800.The current market values of investments X and Y are $21,000 and $55,000, respectively.
a) calculate the expected rate of return on investment X and Y using the most recent year,s data.
b) assuming that the two investments are equally risky,which one should Keel recommend?. Why?

Answer 1

Is it really so difficult to understand ?

Rate of Return = Cash return / Cost
X = 1.5/21 = 7.1%
Y = 6.8/55 = 12.4%

I leave you to work out the 'best' choice :-)

hint .. it's the one that makes the most money (shock, horror)