Duan Smith is interested in two mutually exclusive investments. Both investments have a time horizon of 8 years. The first investment opportunity requires an initial investment of $10,000 to receive equal year-end payments of $2,500. The second investment opportunity requires an $8,500 investment to receive equal year-end payments of $2,000. However, Duan requires a 9.5% return on the first investmen and an 8% return on the second investment
opportunity.
a. Calculate the net present value (NPV) of the first investment opportunity.
b. Calculate the net present value (NPV) of the second investment opportunity.
c. Which investment opportunity is the better choice? Why?
d. Which investment opportunity is the riskier choice? Why?