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Should the Martin invest in the server farm

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Question - Pat and Joan Martin are in the information technology consulting business. Joan's father just passed away and left her $100,000, and Pat and Joan are considering investing this inheritance in a server farm owned by one of their clients. The client has a cash flow problem and has offered the Martin's the following investment proposal: purchase an investment interest for $100,000 today; receive cash distributions of $7,000, $8,000, and $9,000, respectively, at the end of the next three years; and at the end of the third year the owner will purchase back the interest in the server farm for $115,000. Even though the owner is a client the Martin's trust, they consider the investment to be risky. Pat and Joan feel they should earn at least 12% on the investment in order to be fairly compensated for the investment risk.

Should the Martin's invest in the server farm? Briefly explain why.

Regardless of your answer in part a above, assume the Martin's decide to go ahead with this investment. What is their rate of return?

Reference no: EM132276486

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