Problem 1

DouglasKeel, a financial analyst for OrangeIndustries, wishes to estimate the rate of return for twosimilar-risk investments, X and Y. Douglas's research indicates that the immediate past returns will serve as reasonable estimates of future returns. A yearearlier, investment X had a market value of$27,000; and investment Y had a market value of \$64,000. During theyear, investment X generated cash flow of $2,025and investment Y generated cash flow of $ 7,327. The current market values of investments X and Y are $27,781and $64,000, respectively.

a.Calculate the expected rate of return on investments X and Y using the most recentyear's data.

b.Assuming that the two investments are equallyrisky, which one should Douglasrecommend? Why?