Problem 4-B - Cash Flow Investment Decision (12 pts) Cash Flow Investment Decisi

Question

Problem 4-B - Cash Flow Investment Decision (12 pts) Cash Flow Investment Decision Sandra has an opportunity to purchase any of the investments shown in the following table. The purchase price, the amount of the single cash inflow, and its year of receipt are given for each investment. Which purchase recomendations would you make, assuming that Sandra can earn 10% on her investments? A) Calculate the NPVs and compare them (8 pts). B) Which one would you invest? Which one not?(4 pts) Single cash inflow Year of receipt Investment Price $18,000 600 3,500 1,000 $30,000 3,000 10,000 15,000 20 10 40

Explanation / Answer

4-B Investment Price Single cash flow Year of receipt NPV ROI W 18000 30000 5 18,627.64 3.49% X 600.00 3,000.00 20.00 445.93 -25.7% Y 3,500.00 10,000.00 10.00 3,855.43 10.2% Z 1,000.00 15,000.00 40.00 331.42 -66.9% Rate of return 0.10 NPV is calculated using the PV formula with rate of interest being 10% and future value as single cash flws ROI is calculated by using formula(NPV-Price)/Price So we will invest in project Y 4-C Annuity Premium paid today Annual benefit Life NPV_2% NPV_3% ROI_2% ROI_3% A 30,000.00 3100 20 50,689.44 46,120.17 69% 54% B 25,000.00 3,900.00 10.00 35,032.08 33,267.79 40% 33% C 40,000.00 4,200.00 15.00 53,966.91 50,139.33 35% 25% D 35,000.00 4,000.00 12.00 42,301.36 39,816.02 21% 14% NPV for 2% and 3% and ROI for 2% and 3% and basis that we should invest in Project A.

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