Investors Curt and Doug lend $100,000 to each new idea.Curt's history is that he selects low-risk projects or ideas that hit 50% of the time.Doug's history is that she takes on high-risk projects that hit 20% of the time.What rate of return must each successful project pay Curt and Doug for them to break even?
A)Curt's rate is 200% and Doug's rate is 450%.
B)Curt's rate is 100% and Doug's rate is 400%.
C)Curt's rate is 200% and Doug's rate is 400%.
D)Curt's rate is 450% and Doug's rate is 100%.

Question

Quizplus · Accepted Answer

To break even, both Curt and Doug need to make back the $100,000 they lent per project. 
For Curt, since he selects low-risk projects that hit 50% of the time, he expects to make back his initial $100,000 investment plus an additional $100,000 in profit for every 2 successful projects (50% of the time). Therefore, each successful project must pay Curt a rate of return of 100%. 
For Doug, since she takes on high-risk projects that hit 20% of the time, she expects to make back her initial $100,000 investment plus an additional $400,000 in profit for every 5 successful projects (20% of the time). Therefore, each successful project must pay Doug a rate of return of 400%. 
Therefore, the answer is B: Curt's rate is 100% and Doug's rate is 400%.

Investors Curt and Doug Lend $100,000 to Each New Idea