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Mike, a financial analyst for Starbucks, wishes to estimate the rate of return for two similar-risk investments, "A" and "B". Mike's research indicates that the immediate past returns will serve as reasonable estimates of future returns. 1 year earlier, investment "A" had a market value of $20,000; investment "B" had a market value of $55,000. During the year, investment "A" generated cash flow of $1,500 and investment "B" generated cash flow of $6,800. The current market values of investments "A" and "B" are $21,000 and $55,000, respectively.
1)Calculate the expected rate of return on investments "A" and "B" using the most recent year's data.
2)Assuming that the two investments are equally risky, which one should Mike recommend? Why?
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