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Problem 22-11

Investments Quick and Slow cost $1,000 each, are mutually exclusive, and have the following cash flows. The firms cost of capital is 12 percent.

		Cash Inflows
		Q		S
Year 1		$1,200		$357
2				357
3				357
4				357

1. According to the net present value method of capital budgeting, which investment(s) should the firm make? Use Appendix B and Appendix D to answer the question. Use a minus sign to enter negative values, if any. Round your answers to the nearest cent.

   NPV (Investment Quick): $

   NPV (Investment Slow): $

   The firm should make investment(s) -Select-QuickSlowQuick and SlowItem 3 .

2. According to the internal rate of return method of capital budgeting, which investment(s) should the firm make? Use Appendix D to answer the question. Round your answers to the nearest whole number.

   IRR (Investment Quick): %

   IRR (Investment Slow): %

   The firm should make investment(s) -Select-QuickSlowQuick and SlowItem 6 .

3. If Q is chosen, the $1,200 can be reinvested and earn 14 percent. Does this information alter your conclusions concerning investing in Q and S? To answer, assume that Ss cash flows can be reinvested at its internal rate of return. Use the rounded internal rate of return from part b. Use Appendix A and Appendix C to answer the question. Round your answers to the nearest cent.

   Terminal value (Investment Quick): $

   Terminal value (Investment Slow): $

   The firm should make investment(s) -Select-QuickSlowQuick and SlowItem 9 .

   Would your answer be different if Ss cash flows were reinvested at the cost of capital (12 percent)? Use Appendix C to answer the question. Round your answer to the nearest cent.

   Terminal value (Investment Slow): $

   The firm should make investment(s) -Select-QuickSlowQuick and SlowItem 11 .

appendix d

appendix b

appendix a

appendix c