Question
XYZ Company is considering three investment options: investment A, investment B and investment C. Each investment requires an initial cash investment today followed by a
XYZ Company is considering three investment options: investment A, investment B and investment C. Each investment requires an initial cash investment today followed by a stream of positive cash flows in the future. The details of the cash inflows and outflows of each investment option are as follows:
Investment A - initial investment $(100,000), cash inflows year 1 $20,000, year 2 $35,000, year 3 $40,000, year 4 $25,000 and year 5 $45,000
Investment B - initial investment $(150,000), cash inflows year 1 $30,000, year 2 $50,000, year 3 $60,000, year 4 $25,000 and year 5 $50,000.
Investment C - initial investment $(200,000), cash inflows year 1 $40,000, year 2 $60,000, year 3 $70,000, year 4 $40,000 and year 5 $60,000.
Assuming the required rate of return is 5% which investment option should XYZ Company choose. Use NPV to support your answer.
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