An investor is considering a short-term investment in a resort property on a Caribbean island. If the weather is reasonably stable over the next year, the value of the investment is expected to be $1.2 million; however, if this proves to be a heavy hurricane year, the value is expected to be $0.5 million. According to the experts, there is a 40% chance that this will be a year of many hurricanes.
-Refer to the information above. If the appropriate expected rate of return is 15%, what is the maximum amount the investor should invest?
A)$800,000
B)$678,000
C)$1,043,479
D)$739,000

Question

Quizplus · Accepted Answer

The expected value of the investment is:(0.4 * $0.5 million) + (0.6 * $1.2 million) = $0.84 millionThe maximum amount the investor should invest is the present value of the expected value, which is:$0.84 million / (1 + 0.15) = $0.73 million

An Investor Is Considering a Short-Term Investment in a Resort