SOLUTION: Exercise 1: Alec inherited P1,000,000 from his grandparents. He planned to invest it for his future. He was offered a 45% ownership and the other one is 6.5% bond of the fast food

Question 1189860: Exercise 1: Alec inherited P1,000,000 from his grandparents. He planned to invest it for his future. He was offered a 45% ownership and the other one is 6.5% bond of the fast food chain that will be built on their local area. Help Alec decide by illustrating to him the two options with the different successful rate.
Answer by CPhill(1959) (Show Source): You can put this solution on YOUR website!
Here's a breakdown to help Alec decide, illustrating the two options with different success rates:
**Option 1: 45% Ownership in the Fast Food Chain**
This is a direct equity investment. Your return depends entirely on the success of the business.
* **High Success Scenario (25% annual return):** If the fast food chain is highly successful (e.g., strong sales, good management, expands to multiple locations), your 45% ownership could become very valuable. Your initial 1 million pesos could multiply significantly. You'd also likely receive regular dividends (a share of the profits). In 10 years, your investment could grow to approximately 9,313,225 pesos.
* **Moderate Success Scenario (10% annual return):** The business performs reasonably well, covering costs and generating some profit. Your investment grows moderately, and you receive some dividends. In 10 years, your investment could grow to approximately 2,593,742 pesos.
* **Low Success/Failure Scenario (2% annual return):** The business struggles or fails. You could lose some or all of your initial investment. Fast food is a competitive market and requires significant time and effort to make it work. In 10 years, your investment could grow to approximately 1,218,994 pesos.
**Option 2: 6.5% Bond in the Fast Food Chain**
This is a debt investment. You are essentially lending money to the business.
* **Consistent Return:** You will receive a fixed annual interest payment of 6.5% on your 1 million pesos, which is 65,000 pesos per year.
* **Lower Risk:** Bonds are generally considered less risky than equity investments. Even if the fast food chain struggles, they are legally obligated to pay you the interest (unless they go bankrupt).
* **Limited Upside:** Your return is capped at the 6.5% interest rate. You won't participate in the business's growth beyond that fixed interest, even if it's wildly successful.
* **Principal Repayment:** At the end of the bond's term (the maturity date), you will receive your initial 1 million pesos back. In 10 years, your investment will grow to approximately 1,877,137 pesos.
**Which Option is Better?**
The "better" option depends entirely on your risk tolerance and investment goals.
* **If you are risk-averse and prioritize a steady income:** The bond (Option 2) is likely better. You'll receive a reliable 65,000 pesos per year.
* **If you are comfortable with higher risk and seek higher potential returns:** The 45% ownership (Option 1) is potentially better. If the business does well, your return could be much greater than the bond's fixed interest. However, there's also a significant chance you could lose money.
**Additional Factors to Consider:**
* **Your involvement:** Do you want to be actively involved in running the fast food chain? Option 1 would require more of your time and effort.
* **Due diligence:** Before investing in a business (Option 1), you *must* thoroughly investigate the management team, the market, the financials, and the business plan. Don't invest simply because it's a "fast food chain."
* **Liquidity:** Bonds are usually more liquid than a 45% stake in a private business. It's easier to sell a bond if you need access to your money.
* **Diversification:** It's generally wise to diversify your investments. Putting all your money into one business (even if it's a 45% share) is very risky.
**Recommendation:**
Given that this is a significant portion of your inheritance, it's highly recommended that you consult with a qualified financial advisor. They can help you assess your risk tolerance, understand the complexities of each investment option, and create a diversified investment strategy that aligns with your long-term financial goals.
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