ROI and Residual Income

The following investment opportunities are available to an investment center manager:

Project Initial Investment Annual Earnings

A $$800,000$ $$90,000$

B $100,00020,000$

C $300,00025,000$

D $400,00060,000$

Required:

a$.$ If the investment manager is currently making a return on investment of $16$ percent,

which project$($s$)$ would the manager want to pursue?

b$.$ If the cost of capital is $10$ percent and the annual earnings approximate cash flows

excluding finance charges, which project$($s$)$ should be chosen?

c$.$ Suppose only one project can be chosen and the annual earnings approximate cash flows

excluding finance charges. Which project should be chosen?