Question
(The following information and Exhibit 2 apply to questions 6 through 8.) A company that uses a hurdle rate of 10% is evaluating two investment
(The following information and Exhibit 2 apply to questions 6 through 8.)A company that uses a hurdle rate of 10% is evaluating two investment opportunities, shown in Exhibit 2, and can invest in only one of them. Project A requires an upfront investment of $200 million today and is expected to deliver $295 million in one year; project B requires an upfront investment of $400 million today and is expected to deliver $540 million in one year.
Exhibit 2 (In Millions of $)
YearAB0-$200.0-$400.01$295.0$540.0
Which one of the statements below is true? Given all the information above, and the fact that the company can invest in only one project, the company should ...
invest in neither project because they are not profitable.
invest in neither project because both have a negative cash flow.
invest in project A.
invest in project B.
find tools other than NPV and IRR to decide whether or not to invest in either project because neither the NPV nor the IRR of these two projects can be calculated.
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