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 80% of the time.Doug's history is that she takes on high-risk projects that hit 40% 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 150%,and Doug's rate is 25%.
B)Curt's rate is 40%,and Doug's rate is 40%.
C)Curt's rate is 25%,and Doug's rate is 150%.
D)Curt's rate is 30%,and Doug's rate is 150%.

Question

Quizplus · Accepted Answer

To break even, the return from the successful projects must cover the total investment in all projects. For Curt, with an 80% success rate on a $100,000 investment, 80% of the projects need to cover 100% of the investment. This means each successful project needs to return the original investment plus 25% more (since 80% * 125% = 100%). For Doug, with a 40% success rate, each successful project needs to return the original investment plus 150% more to cover the losses from the 60% that fail (since 40% * 250% = 100%).

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