You invested $20,000 in a local small business one year ago and the investment has just generated a return of $1,200. You recently met with the business owners and they felt confident that if you left your money invested in their company, their firm would generate enough profits to promise you payments of $1,200 per year in perpetuity (with the next payment occurring one year from now). What effective annual rate of return are the business owners promising you on your investment?

Looking at other investment opportunities, you note that other long-term investments of similar risk to this small business offer an expected annual return of 8%. Should you remain invested in the firm?