Lindsey and Tobias have the opportunity to invest in a project that requires an investment of $3,000. There is a 35% chance of a $2,900 return; a 40% chance of a $3,400 return; and a 25% chance of a $4,500 return one year from now. Lindsey requires a 15% return on the project after the first year, but Tobias requires a return of only 12%. Using the expected rate of return:
A) Lindsey and Tobias should both invest in the project
B) Only Tobias should invest in the project
C) Only Lindsey should invest in the project
D) Lindsey and Tobias should both reject the project

Question

Quizplus · Accepted Answer

The expected rate of return is 35% * $2,900 + 40% * $3,400 + 25% * $4,500 = $3,560. This is greater than both Lindsey's and Tobias's required rates of return, so they should both invest in the project.

Lindsey and Tobias Have the Opportunity to Invest in a Project