Investors Bill and Maggie lend $60,000 to each new idea. Bill picks low-risk projects that are successful 60% of the time. Maggie takes on high-risk projects that that are successful 20% of the time
What rate of return must each successful project pay Bill and Maggie for them to break even?
What will be an ideal response?
Answer: With Bill's rate of success, we know that six out of ten projects are successful and that Bill is repaid the loan six out of ten times. Therefore, he must get enough funding from the six successful projects to cover all ten. So if he makes ten loans of $60,000 each, he needs to recover $600,000 from the six successful projects.
Thus each successful project must repay = $100,000. Therefore, the loan "return" rate on each successful project must be: = 66.67%.
Maggie's rate of success of 20% means that she has two successful projects out of every ten and so:
= $300,000 needs to be recovered giving a loan return rate of:
= 400% from each of the two successful projects.
You might also like to view...
In the hierarchy of effects model, preference for a particular product only occurs after each of the following occurs, except:
A) awareness B) liking C) knowledge D) conviction
A customer-management organization deals with individual customers rather than the mass market or market segments
Indicate whether the statement is true or false