Return on Investment versus Residual Income Assumes it is December 1. You decide to earn some extra money so you can purchase nicer presents next year. You have identified two investment alternatives as follows: 

Option #1: Borrow $100 from the bank for one year at a 10% interest rate. Purchase a piece of art for $100 today and receive $150 from its sale one year from now. 

Option #2: Borrow $1,000 from the bank for one year at a 10% interest rate. Purchase a different piece of art for $1,000 today and receive $1,300 from its sale one year from now. 

Required

1. Ignoring the interest cost to the bank, what interest rate would your money earn under Option #1? 

2. Under Option # 2? Are these rates greater than the 10% cost of financing? Which option is better?

Answer rating: 100% (QA)

Ignoring the interest cost to bank Return on investment Net profitinvestment100 Since inte... View the full answer