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You are considering an investment in Slots o Fun, the greatest casino on the Las...

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Accounting

You are considering an investment in Slots o Fun, the greatest casino on the Las Vegas strip. You figure that there is an 80% chance that the investment will pay off $6000 after one year, and a 20% chance that it will pay off $4000.

  1. If you require an expected return of 12% for an investment with this amount of risk, how much would you be willing to pay for the investment?
  2. What realized return would you make in the good outcome?
  3. What realized return would you make in the bad outcome?

Now suppose that instead of paying all cash for the investment, you borrow $3000 at 5% interest for one year to help fund the investment.

  1. What is your expected return?
  2. What would be your realized return in the good outcome?
  3. What would be your realized return in the bad outcome?
  4. Explain the differences between your answers to parts a and b.

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