|
Question 1189719: 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! Let's break down Alec's investment decision, illustrating the potential outcomes of each option:
**Option 1: 45% Ownership in the Fast Food Chain**
This is a direct equity investment. Alec's return depends entirely on the business's success.
* **High Success Scenario (25% annual return):** If the fast food chain is highly successful (e.g., strong sales, good management, expands to multiple locations), Alec's 45% ownership could become very valuable. His initial 1 million pesos could multiply significantly. He'd also likely receive regular dividends (a share of the profits). In 10 years, his investment could grow to approximately 9,313,226 pesos.
* **Moderate Success Scenario (10% annual return):** The business performs reasonably well, covering costs and generating some profit. Alec's investment grows moderately, and he receives some dividends. In 10 years, his investment could grow to approximately 2,593,742 pesos.
* **Low Success/Failure Scenario (2% annual return):** The business struggles or fails. Alec could lose some or all of his initial investment. Fast food is a competitive market and requires significant time and effort to make it work. In 10 years, his investment could grow to approximately 1,218,994 pesos.
**Option 2: 6.5% Bond in the Fast Food Chain**
This is a debt investment. Alec is essentially lending money to the business.
* **Consistent Return:** Alec will receive a fixed annual interest payment of 6.5% on his 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 Alec the interest (unless they go bankrupt).
* **Limited Upside:** Alec's return is capped at the 6.5% interest rate. He 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), Alec will receive his initial 1 million pesos back. In 10 years, his investment will grow to approximately 1,877,137 pesos.
**Which Option is Better?**
The "better" option depends entirely on Alec's risk tolerance and investment goals.
* **If he is risk-averse and prioritizes a steady income:** The bond (Option 2) is likely better. He'll receive a reliable 65,000 pesos per year.
* **If he is comfortable with higher risk and seeks higher potential returns:** The 45% ownership (Option 1) is potentially better. If the business does well, his return could be much greater than the bond's fixed interest. However, there's also a significant chance he could lose money.
**Additional Factors to Consider:**
* **His involvement:** Does he want to be actively involved in running the fast food chain? Option 1 would require more of his time and effort.
* **Due diligence:** Before investing in a business (Option 1), he *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 his inheritance, it's highly recommended that Alec consult with a qualified financial advisor. They can help him assess his risk tolerance, understand the complexities of each investment option, and create a diversified investment strategy that aligns with his long-term financial goals.
|
|
|
| |
