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Hi Sir,
I am doing degree in university. I encountered this problem. Hope you can help me (although it is not ACCA).
2 investment opportunities, average risk projects:
project 1 cost at t=0 $25,000 rate of return 18%
project 2 cost at t=0 $45,000 rate of return 16%which project should he accept, why?
My answer is project 1, the rate of return is higher. Is that all? Its a 6marks questions so I doubted..
There is no easy answer without more information.
The problem is that although project 1 is giving a higher return, you are able to invest much more in project 2.
An 18% return on 25000 will give less per year than a 16% return on 45000.
However the problem is that since they must have access to 45000 in order for project 2 to be an option, what could the do with the other 20000 if they chose project 1 🙂
If there was nothing else available, then project 2 is better.remembered my lecturer said about the last part of what you explained. Thank you so much for your help Sir.
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