Get Rich Corporation has to choose between two investment opportunities. Investment A requires an immediate cash outlay
Question:
Get Rich Corporation has to choose between two investment opportunities. Investment A requires an immediate cash outlay of $\$ 100,000$ and provides after-tax income of $\$ 20,000$ per year for 10 years. Investment B requires an immediate cash outlay of $\$ 1,000$ and generates after-tax income of $\$ 350$ per year for 5 years.
1. Using a cost of capital of 12 percent, calculate the net present value of each investment, and determine which one Get Rich should select.
2. Calculate the internal rate of return of each investment. On the basis of this method, which investment should Get Rich select?
3. Interpretive Question: How do you account for the difference in rankings? Under the circumstances, which method would you rely on for your decision?
Step by Step Answer:
Survey Of Accounting
ISBN: 9780538846172
1st Edition
Authors: James D. Stice, W. Steve Albrecht, Earl Kay Stice, K. Fred Skousen