Question

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OA frm has two pessible investments with the following cash inflows. Each Investment costs $540, and the cost of capital is seven percent. Use Appendix 8 and Appendix D to questions. Assume that the investments are not mutually exclusive and there are no budget restrictions. answer the Cash Inflows Year A 350 160 120 $210 210 210 a. Based on each investment's net present value, which Investment(s) should the firm make? Use a minus sign to enter negative values, if any. Round your answers to the nearest dollar Investment A: The firm should make -Select b. Based on each investment's internal rate of return, which investment(s) shouid the firm make? Round your answers to the nearest whole number Investment The firm should make Select- Is this the same answer you obtained in part b? It -Select the same answer as obtained in part b C.If the cost of capital were to increase to 9 percent, which investment(s) should the firm make? Use a minus sign to enter negative values, if any. Round your answers for the net present values to the nearest dolar and for internal rates of return to the nearest whole number Net present values: Investment A: Investment 8:

Answer 1

a.Project A

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$540. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 7%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 7% cost of capital is $24.81.

Project B

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$540. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 7%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 7% cost of capital is $11.11

According to the NPV rule, the firm should make investment in project A since it has the higher net present value.

b. Project A

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$540. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 10.07%.

Project B

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$540. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 8.12%.

According to the IRR rule, the firm should make investment in project A since it has the higher internal rate of return.

It is not the same answer as obtained in part b.

c.Net Present Value

Project A

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$540. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 9%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 9% cost of capital is $8.43.

Project B

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$540. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 9%.
• Press the down arrow and CPT buttons to get the net present value.

Net Present value of cash flows at 9% cost of capital is -$8.43

According to the NPV rule, the firm should make investment in project A since it has the higher net present value.

Internal Rate of Return

Project A

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$540. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 10.07%.

Project B

Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$540. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 8.12%.

According to the IRR rule, the firm should make investment in project A since it has the higher internal rate of return.

In case of any query, kindly comment on the solution.