A close friend of yours is expanding her business and offers you the opportunity to invest $15,000 in a project that she promises will return $17,000 after one year. Because you have only $3,000 in cash, you will have to borrow $12,000 from your bank. The bank charges an annual 12 percent simple interest rate. You would really like to invest with your friend.
- Is it a profitable venture?
- What else would you need to know about your friend's expansion project to make a decision?
- Discuss whether or not you decide to invest with your friend, and provide detailed reasons for your decision, including the financial calculations you made to reach your conclusion.
- Which of the factors above would have to be different to change your mind, one way or the other?
- In response to at least two of your classmate's posts, propose at least two further questions you would need to ask the friend about the incremental cash flows of the expansion project. How should different levels of risk factor into their decisions?