Investment A B C Initial cost($millions) 5.5 $3.0 $2.0 Expected life 10 yrs 10 y

Question

Investment A B C
Initial cost($millions) 5.5 $3.0 $2.0
Expected life 10 yrs 10 yrs 10 yrs
NPV @15% $340,000 $300,000 $200,000
IRR 20% 30% 40%

A. If the company can raise large amounts of money at an annual cost of 15 percent, and if the investments are independent of one another, which should it undertake?
B. If the company can raise large amounts of money at an annual cost of 15 percent, and if the investments are mutually exclusive, which should it undertake?
C. Considering only these three investments, if the company has a fixed capital budget of $5.5 million, and if the investments are independent of one another, which should it undertake?

Explanation / Answer

Independent of each other it should do them all as they have positive NPV's. If they are mutually exclusive it should do A because it has the highest NPV. If it only has a budget of 5.5 it should do B and C for the highest NPV.

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