(Read the chapter appendix before attempting this problem.) A company is considering the following investment opportunities.
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 an other, 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 in dependent of one another, which should it undertake?
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