George lends $200,000 for each new idea. George's history is that he selects low-risk projects or ideas that hit 80% of the time. What rate of return must each successful project pay George for him to break even?
A) 20.50%
B) 22.00%
C) 23.50%
D) 25.00%
Answer: D
Explanation: D) With George's rate of success, we know that eight out of ten projects are successful and that George is repaid the loan eight out of ten times. Therefore, we must get enough funding from the eight successful projects to cover all ten projects. So if he makes ten loans of $200,000 each, he needs to recover $2,000,000 from the eight successful projects. Thus, each successful project must repay
= $250,000. Therefore, the loan "return" rate on each successful project must be: = 25%.
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