Question
A firm has the following investment alternatives. Each one lasts a year INVESTMENT A B C Cash Inflow $1,150 $560 $600 Cash Outflow $1,000 $500
A firm has the following investment alternatives. Each one lasts a year
INVESTMENT | A | B | C |
Cash Inflow | $1,150 | $560 | $600 |
Cash Outflow | $1,000 | $500 | $500 |
The firms cost of capital is 7 percent. A and B are mutually exclusive, and B and C are mutually exclusive.
What is the net present value of investment A? Investment B? Investment C?
What is the internal rate on investment A? Investment B? Investment C?
Which investment(s) should the firm make? Why?
If the firm had unlimited sources of funds, which investment(s) should it make? Why?
If there were another alternative, investment D, with an internal rate of return of 6 percent, would that alter your answer to question (d)? Why?
If the firms cost of capital rose to 10 percent, what effect would that have on investment As internal rate of return?
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