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Assume that your firm wants to choose between two project options: - Project A: $500,000 invested today will yield an expected income stream of $150,000
Assume that your firm wants to choose between two project options: - Project A: $500,000 invested today will yield an expected income stream of $150,000 per year for five years, starting in Year 1 . - Project B: an initial investment of $400,000 is expected to produce this revenue stream: Year 1=0, Year 2=$50,000, Year 3=$200,000, Year 4=$300,000, and Year 5=$200,000. Assume that a required rate of return for your company is 10% and that inflation is expected to remain steady at 3% for the life of the project. QUESTION: Which is the better investment? Why? (4 marks) Assume that your firm wants to choose between two project options: - Project A: $500,000 invested today will yield an expected income stream of $150,000 per year for five years, starting in Year 1 . - Project B: an initial investment of $400,000 is expected to produce this revenue stream: Year 1=0, Year 2=$50,000, Year 3=$200,000, Year 4=$300,000, and Year 5=$200,000. Assume that a required rate of return for your company is 10% and that inflation is expected to remain steady at 3% for the life of the project. QUESTION: Which is the better investment? Why? (4 marks)
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