As the investment manager, you are faced with the problem of choosing between two investment projects (X and Y). Each project costs c40,000.

- Investment X pays c25,000 for the first year, c10,000 for the second year, and c15,000 for the third year.
- Investment Y pays c15,000 for the first year, c25,000 for the second year, and c10,000 for the third year.

If your required return is 10% per annum, which of the two projects will you choose and why?

Additionally, explain two determinants of the own price elasticity of demand for a good or service.

To determine which investment project to choose, calculate the present value of the cash flows for each project and compare. Project X has a higher total present value, making it the better choice. Choose Project X.

Explanation:

To determine which investment project to choose, we need to calculate the present value of the cash flows for each project. For Project X, the cash flows are c25,000 for the first year, c10,000 for the second year, and c15,000 for the third year. For Project Y, the cash flows are c15,000 for the first year, c25,000 for the second year, and c10,000 for the third year. Using the required return of 10% per annum, we can discount each cash flow back to its present value using the formula PV = CF / (1 + r)^n, where PV is the present value, CF is the cash flow, r is the required return, and n is the number of years.

Calculating the present value for Project X, we get:

Year 1: PV = c25,000 / (1 + 0.10)^1 = c22,727.27

Year 2: PV = c10,000 / (1 + 0.10)^2 = c8,264.46

Year 3: PV = c15,000 / (1 + 0.10)^3 = c11,241.42

Adding up the present values, we get a total present value of c42,233.15 for Project X.

Calculating the present value for Project Y, we get:

Year 1: PV = c15,000 / (1 + 0.10)^1 = c13,636.36

Year 2: PV = c25,000 / (1 + 0.10)^2 = c18,595.04

Year 3: PV = c10,000 / (1 + 0.10)^3 = c7,480.31

Adding up the present values, we get a total present value of c39,711.71 for Project Y.

Based on the present value calculations, Project X has a higher total present value, indicating that it is the better investment choice. Therefore, as the investment manager, you should choose Project X.

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