Mutually exclusive investments and risk Lara Fredericks is interested in two mutually exclusive investments. Both investments cover the same time horizon of 6 years. The cost of the first investment is $10,000, and Lara expects equal and consecutive year-end payments of $3,000. The second investment promises equal and consecutive payments of $3,800 with an initial outlay of $12,000 required. The current required return on the first investment is 8.5%, and the second carries a required return of 10.5%.
a. What is the net present value of the first investment?
b. What is the net present value of the second investment?
c. Being mutually exclusive, which investment should Lara choose? Explain.
d. Which investment was relatively more risky? Explain.
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