Investment Project Selection
A company has $2 million available for a one-year investment. It is considering two options. Option 1 is to develop a new product line, which has an initial cost of $2 million and is projected to generate a total return of $2.15 million in one year, though this outcome is not guaranteed. Option 2 is to place the $2 million in a financial instrument that offers a guaranteed 6% annual return. Critically evaluate which option the company should choose. Your response must justify your recommendation by explaining how the value of the forgone alternative should be used as a benchmark for the decision, and identify the primary factor that makes a direct comparison between the two returns difficult.
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Economics
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