Now, Dr. Pennyworth has a chance to purchase one of two professional cricket clu

Question

Now, Dr. Pennyworth has a chance to purchase one of two professional cricket clubs, the Miami Manatees or the Jacksonville Gemini. At the beginning of last year, the Manatees were purchased for $100 million, provided $10 million in profits, and are currently on sale for $110 million. On the other hand, the Gemini started the year purchased at $80 million, provided $30 million in profits, and are currently on sale for $140 million. Calculate the rate of return for the owners of each team last year. Which team would you suggest that Dr. Pennyworth purchase today?

For the above problem, you project that the most optimistic profits for the Manatees this year is $35 million, while the most pessimistic projection is $5 million. Your projections for the Gemini are $32 million and $7 million, respectively. Based only on the range, which do you think is the riskier investment? Which one would you choose?

Explanation / Answer

1. Calculation of Rate of Return:

For Manatees = 10 / 100 = 10%

For Gemini = 30 / 80 = 37.50%

On the basis of Rate of return analysis, it is advisable to purchase Gemini today.

On the basis of projection investment in Manatees is riskier because its range of variation is wider than the Gemini. There is a difference of $30 million between optimistic and pessimistic profit while in case of Gemini it is only $25 million.

So, it is advisable to choose the Gemini.

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