Question 1198979: Alec inherited ₱1,000,000 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! To help Alec decide between the **45% ownership** and the **6.5% bond**, we analyze and illustrate both options under different scenarios for the success of the fast food chain.
---
### **Option 1: 45% Ownership**
- Alec would own 45% of the fast food chain's profits (or losses).
- The future value of this option depends on the success of the business.
- Define success rates with corresponding projected annual profits for the business:
- **High success**: Annual profit = ₱3,000,000.
- **Moderate success**: Annual profit = ₱1,500,000.
- **Low success**: Annual profit = ₱500,000.
- **Failure**: Annual profit = ₱0.
Alec’s share in profits is:
\[
\text{Alec's profit} = 0.45 \times \text{Business Annual Profit}
\]
#### **Ownership Illustration**
| Success Level | Business Annual Profit (₱) | Alec's Share (₱) |
|---------------|-----------------------------|------------------|
| High | 3,000,000 | 1,350,000 |
| Moderate | 1,500,000 | 675,000 |
| Low | 500,000 | 225,000 |
| Failure | 0 | 0 |
---
### **Option 2: 6.5% Bond**
- A bond offers a guaranteed annual return of **6.5%** on Alec’s ₱1,000,000 investment.
- Annual return:
\[
\text{Annual Bond Return} = 0.065 \times 1,000,000 = 65,000 \, \text{₱ per year}.
\]
This is a **fixed income** regardless of the success of the business.
#### **Bond Illustration**
| Success Level | Alec's Annual Return (₱) |
|---------------|---------------------------|
| High | 65,000 |
| Moderate | 65,000 |
| Low | 65,000 |
| Failure | 65,000 |
---
### **Comparison of Both Options**
#### **1. Summary of Returns**
| Success Level | Ownership Share (₱) | Bond Return (₱) | Which is Better? |
|---------------|-----------------------|-----------------|--------------------------|
| High | 1,350,000 | 65,000 | Ownership significantly better |
| Moderate | 675,000 | 65,000 | Ownership still better |
| Low | 225,000 | 65,000 | Bond better |
| Failure | 0 | 65,000 | Bond significantly better|
---
### **2. Risk and Reward Analysis**
- **Ownership (45%)**:
- High risk: Alec's returns are dependent on the business's performance.
- High reward: Substantial earnings if the business succeeds.
- **Bond (6.5%)**:
- Low risk: Provides guaranteed returns regardless of business performance.
- Lower reward: Fixed annual income of ₱65,000, which is small compared to potential high returns from ownership.
---
### **Recommendation for Alec**
- If Alec is **risk-averse** and prefers stability, he should invest in the **6.5% bond** for consistent and guaranteed returns.
- If Alec is **risk-tolerant** and believes strongly in the business's success, the **45% ownership** is a better choice, as it offers potentially high returns in the long run.
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