A firm’s cost of capital is 9 percent. The firm has three investments to choose among;...
A firm’s cost of capital is 9 percent. The firm has three investments to choose among; the cash flows of each are as follows:
| Cash Inflows | |||||||||
| Year | A | B | C | ||||||
| 1 | $ | 457 | — | $ | 1,344 | ||||
| 2 | 457 | — | — | ||||||
| 3 | 457 | — | — | ||||||
| 4 | — | $ | 1,756 | — | |||||
Each investment requires a $1,200 cash outlay, and investments B and C are mutually exclusive. Use Appendix A, Appendix B and Appendix D to answer the questions. Assume that the investments are not mutually exclusive and there are no budget restrictions.
- Which investment(s) should the firm make according to the net
present values? Use a minus sign to enter negative values, if any.
Round your answers to the nearest dollar.
A: $
B: $
C: $
The firm should make investment(s) A, B, C, A and B, or A and C?
- Which investment(s) should the firm make according to the
internal rates of return? Round your answers to the nearest whole
number.
A: %
B: %
C: %
The firm should make investment(s) A, B, C, A and B, or A and C? .
- If all funds from investment C are reinvested at 10 percent,
which investment(s) should the firm make? Round your answer to the
nearest dollar.
Terminal value of investment C: $
The firm should make investment(s) A, B, C, A and B, or A and C?.
Would your answer be different if the reinvestment rate were 9 percent? Round your answer to the nearest dollar.
Terminal value of investment C: $
The firm should make investment(s) A, B, C, A and B, or A and C?
Appendix A
Appendix B
Appendix D
Homework Answers
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