Question

Problem 22-17 A firm has the following investment alternatives. Each costs $14,000 and has the following cash inflows. Year Cash Inflow 1 2 3 $5,000 $5,000 $5,000 $5,000 4,000 5,600 5,100 4,300 5,500 4,500 3,900 3,100 Investment A is considered to be typical of the firm's investments. Investment B's cash flows vary over time but are considered to be less certain. Investment C's cash flows diminish over time but because most of the cash flows occur early in the investment's life, they are considered to be more certain. The firm's cost of capital is 10 percent, but the financial manager uses a hurdle rate of 6 percent for less-risky projects and 14 percent for riskier projects. Use Appendix B and Appendix D to answer the questions. Assume that the investments are not mutually exclusive and there are no budget restrictions. a. Based on the cost of capital, should any of the investments be made? Use a minus sign to enter negative values, if any, Round your answers to the nearest dollar. NPV (Investment A): $

Answer 1

A B C DE Cashflows 0 $ 1 $ 2 $ 3 $ 41 $ 14,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ -14,000$ 4,000 $ 5,600 $ 5,100 $ -14,000 5,500 4,500 3,900 3,100 a) NPV $ 1,849 $ 1,033 $234 =NPV(10%,C4:C7)+C3] =NPV(10%,D4:07)+D3] =NPV(10%,E4:E7)+E3 12 b) NPV $ 1,849 $194 $ 924 =NPV(10%,C4:C7)+C3] =NPV(14%,D4:07)+D3 ENPV(6%,E4:E7)+E3

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