Question: Norman Gerrymander has just received a $2 million bequest. How should he invest it? There are four immediate alternatives. a.Investment in one-year U.S. government securities

Norman Gerrymander has just received a $2 million bequest. How should he invest it?

There are four immediate alternatives.

a.Investment in one-year U.S. government securities yielding 5 percent.

b. A loan to Norman’s nephew Gerald, who has for years aspired to open a big Cajun restaurant in Duluth. Gerald had arranged a one-year bank loan for $900,000, at 10 percent, but asks for a loan from Norman at 7 percent.

c. Investment in the stock market. The expected rate of return is 12 percent.

d. Investment in local real estate, which Norman judges is about as risky as the stock market. The opportunity at hand would cost $1 million and is forecasted to be worth $1.1 million after one year. Which of these investments have positive NPVs? Which would you advise Norman to take?

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