Two mutually exclusive investments cost $10,000 each and have the following cash
ID: 2454846 • Letter: T
Question
Two mutually exclusive investments cost $10,000 each and have the following cash inflows. The firm’s cost of capital is 10%.
Cash flow A B
Year 1 --- ----
Year 2 15,407 -----
Year 3 ---- ----
Year 4 ----- 19,390
-------------------------------
A. What is the net present value of each investment?
B. What is the internal rate of return of each investment?
C. Which investment(s) should the firm make? D. Would your answers be different to C if the funds received in Year 2 for investment A could be reinvested at 16%?
Show your work.
Explanation / Answer
Answer A ) NPV of Project A = 2733.0 and project B =3243.63
Answer B ) IRR Project A = 24.12% and Project B = 18 %
Answer C) Project A IRR is more than B hence firm should make investment in Project A
A B PVIF Cost -10000 -10000 Cash Flow -1 0 0 0.91 Cash Flow -2 15407 0 0.83 12733.06 Cash Flow -3 0 0 0.75 Cash Flow -4 0 19390 0.68 13243.63Related Questions
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