A risky $400,000 investment is expected to generate the following cash flows: YE

Question

A risky $400,000 investment is expected to generate the following cash flows:

YEAR                        1                                   2                               3                              4

                             $145,300                       $175,445                  $156,788                 $145,000

A.) If the firm's cost of capital is 10%, should the investment be made?

B.) An alternative use for the $400,000 is a four-year U.S. Treasury bond that pays $28,000 annually and repays the $400,000 at the maturity. Management believes that the cash inflows from the risky investment are equivalent to only 75% of the certain investment, which pays 7%. Does this information alter the decision in A.

Please explain in detail and show all work. Thank you so much:-)

Explanation / Answer

I have no idea about b.
But for a, I can solve it. Here is the solution.
NPV = (-400000)+(145300/(1.1^1))+(175445/(1.1^2))+(156788/(1.1^3))+(145000/(1.1^4)) = 93920.87289 > 0
So investment should be made.

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