Scenario: Diversification Morris Is Considering Investing $10,000 in a Sunglass

question 164

Multiple Choice

Scenario: Diversification Morris is considering investing $10,000 in a sunglass company or a rain poncho company.If it is a rainy year and he invests only in the sunglass company, he expects to lose $5,000 at the end of the year.However, if it is a rainy year and he invests only in the rain poncho company, he expects to earn $10,000.If it is a sunny year and he invests only in the sunglass company, he expects to earn $10,000 at the end of the year; if he invests only in the rain poncho company, he expects to lose $5,000 in a sunny year.There is a 50% chance of a sunny year and a 50% chance of a rainy year.
(Scenario: Diversification) Based on the information in the scenario Diversification, if Morris invests all of his money in the rain poncho company, what is his expected gain or loss?

• A)a loss of $2,500
• B)to break even
• C)a gain of $2,500
• D)a gain of $10,000

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Definitions:

Fixed Assets

Long-term tangible assets that are used in the operations of a business and are not expected to be consumed or converted into cash in the short term.

CCA Pool

A grouping method for depreciating assets in a way that combines similar assets for the purposes of calculating capital cost allowance for tax purposes.

Marginal Tax Bracket

The tax rate that applies to the last dollar of an individual's income, used to determine the tax impact of additional income.

Net Cash Flow

The difference between a company's cash inflows and outflows within a given period.