The Deal Nobody Wants

If you were presented an opportunity to invest at a guaranteed rate of return of 7.0%, but in order to obtain the needed investment funds you’d have to borrow at 8.0% per year for the money, would you be interested? Would you know the appropriate questions to ask to determine the attractiveness of this offer?

Borrow
Invest
$100,000 @ 8.0%
$100,000 @ 7.0%
Year
Outstanding Loan
Cost to Borrow
Interest Earned
Cummulative Earnings
1
$100,000
$8,000
$7,000
$107,000
2
$100,000
$8,000
$7,490
$114,490
3
$100,000
$8,000
$8,041
$122,504
4
$100,000
$8,000
$8,575
$131,080
5
$100,000
$8,000
$9,176
$140,255
10
$100,000
$8,000
$12,869
$196,705
15
$100,000
$8,000
$18,050
$275,903
20
$100,000
$8,000
$25,316
$386,968
25
$100,000
$8,000
$35,507
$542,743
30
$100,000
$8,000
$49,800
$761,226
$100,000
$240,000
$761,226
  
Total Costs:
$340,000
Total Earnings:
$761,226
TOTAL PROFIT
$421,226

So as you can see, things aren’t always as they appear at first glance. While on the surface, the initial proposition sounded ludicrous, upon closer examination, it becomes clear that the way the interest is calculated is critical to the analysis of the question. Therefore, it becomes equally clear that knowing the right questions to ask is essential to being able to perform an effective due diligence.

Another favorite quote from Will Rogers that points out the importance of a questioning mind,
"It isn't what we don't know that gives us trouble, it's what we know that ain't so."

And to add on of my own "Don-isms",
"We can guard ourselves against the things we know, and we can guard ourselves against the things we know we don't know (we'll seek out appropriate advice). It's the things we don't know we don't know that blind-side us because they weren't even in our conciousness to know we should be concerned about them!"

While the preceeding are just a few of many lessons to be learned, it is a good way to demonstrate the notion that there are many assumptions that we make in life that with a slight “twist” can be made to work for us instead of against us. It also points out that we should always question the facts...and then question them again.