Question
The Reading Railroad is considering a $100,000 investment in either of two companies. Both projects are expected to have a 10-year life. The annual cash
The Reading Railroad is considering a $100,000 investment in either of two companies. Both projects are expected to have a 10-year life. The annual cash flows for the following 10 years are as follows:
| Year | Electric CO | Water Works |
| 1 | $70,000 | $15,000 |
| 2 | $15,000 | $15,000 |
| 3 | $15,000 | $70,000 |
| 4-10 | $10,000 | $10,000 |
a) Using the payback method, what decision should be made if the firm requires a payback of 4 years for all projects. Show your work. (5 Marks)
b) Explain why the answer in part a can be misleading. (2 Marks)
c) Calculate the NPV of the Electric Co investment given that Reading Railroad has a cost of capital = 8%. (4 Marks)
d) Using a financial calculator or excel, calculate the IRR of the Electric Co investment. (2 Marks)
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Handbook Of Financial Markets Dynamics And Evolution
Authors: Thorsten Hens
1st Edition
0323165478, 978-0323165471
