Question
You must choose between one of the following investment options: Option 1 requires an investment of $50,000 now, and $10,000 at the start of year
You must choose between one of the following investment options:
Option 1 requires an investment of $50,000 now, and $10,000 at the start of year 4. In return, you will receive $18,000 per year at the end of years 2, 4, and 5. There will be no cash flow in year 1. You will also receive $15,000 at the end of year 6.
Option 2 will provide the following cash flows: $20,000 inflow in years 2 and 5, $12,000 outflow at end of year 3, $30,000 inflow at the end of year 4, and an outflow of $5,000 at the end of year 6. No cashflows occur in year 1. The initial investment required today is $45,000.
IF your required rate of return is 9% C/A,
1: What is the NPV of Option 1?
2: What is the IRR of Option 1?
3: What is the NPV of Option 2?
4: What is the IRR of Option 2?
5: Which option should you choose?
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