A firm's cost of capital is 12%. The firm has three investment(s) to choose among; the cash flows of each are as follows:

CASH INFLOWS

YEAR A B C

1 $395 ____ $1,241

2 $395 ____ ______

3 $395 ____ ______

4 ______ $1,749 ______

Each investment requires a $1,000 cash outlay, and investments B and C are mutually exclusive.

A.) Which investment(s) should the firm make according to the net present values? Why?

B.) Which investment(s) should the firm make according to the internal rates of return? Why?

C.) If all funds are reinvested at 15 %, which investment(s) should the firm make? Would your answer be different if the reinvestment rate were 12%?

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