Problem 22-04

A firm has the following investment alternatives:

	Cash Inflows
Year		A			B			C
1		$	1,085		$	3,193
2			1,085
3			1,085					$	3,930

Each investment costs $2,800; investments B and C are mutually exclusive, and the firms cost of capital is 9 percent. Use Appendix A, Appendix B and Appendix D to answer the questions. Assume that the investments are not mutually exclusive and there are no budget restrictions.

1. What is the net present value of each investment? Use a minus sign to enter a negative values, if any. Round your answers to the nearest dollar.

   A: $

   B: $

   C: $

2. According to the net present values, which investment(s) should the firm make?

   The firm should make investment(s) -Select-ABCA and BA and CItem 4 .

3. What is the internal rate of return on each investment? Round your answers to the nearest whole number.

   A: %

   B: %

   C: %

4. According to the internal rates of return, which investment(s) should the firm make?

   The firm should make investment(s) -Select-ABCA and BA and CItem 8 .

5. According to both the net present values and internal rates of return, which investments should the firm make?

   The net present value and internal rate of return lead to -Select-the same decisiondifferent decisionsItem 9 so the firm should -Select-select investment Aselect investment Bselect investment Cselect investments A and Bselect investments A and Cresolve the conflict between B and CItem 10 .

6. If the firm could reinvest the $3,193 earned in year 1 from investment B at 10 percent, which investment(s) should the firm make? Round your answer to the nearest dollar.

   Terminal value of investment B: $

   The firm should make investment(s) -Select-ABCA and BA and CItem 12 .

   Would the answer be different if the rate were 12 percent? Round your answer to the nearest dollar.

   Terminal value of investment B: $

   The firm should make investment(s) -Select-ABCA and BA and CItem 14 .

7. If the firms cost of capital had been 10 percent, what would be investment As internal rate of return? Round your answer to the nearest whole number.

   %

8. The payback method of capital budgeting selects which investment?

   The payback method of capital budgeting selects investment -Select-ABCItem 16 .