A firm has the following investment alternatives and has the following cash inflows. Each costs $130,000, investments C and D are mutually exclusive, and the firm’s cost of capital is 9%. Cash Flows Year A B C D 1 $45,000 $43,000 $147,000 - 2 45,000 50,000 - - 3 45,000 60,000 - $176,000 a. What is the net present value of each investment? Which investment(s) should the firm make and why? b. What is the internal rate of return on each investment? Which investment(s) should the firm make and why? c. If the firm could reinvest the $147,000 earned in year 1 from investment C at 12%, would that affect your answers? d. The payback method would select which investment? Why?
A firm has the following investment alternatives and has the following cash inflows. Each costs $130,000, investments C and D are mutually exclusive, and the firm’s cost of capital is 9%. Cash Flows Year A B C D 1 $45,000 $43,000 $147,000 - 2 45,000 50,000 - - 3 45,000 60,000 - $176,000 a. What is the net present value of each investment? Which investment(s) should the firm make and why? b. What is the internal rate of return on each investment? Which investment(s) should the firm make and why? c. If the firm could reinvest the $147,000 earned in year 1 from investment C at 12%, would that affect your answers? d. The payback method would select which investment? Why?
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 13E: Buena Vision Clinic is considering an investment that requires an outlay of 600,000 and promises a...
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A firm has the following investment alternatives and has the following
Each costs $130,000, investments C and D are mutually exclusive, and the firm’s cost of capital is 9%.
| Cash Flows | ||||
| Year | A | B | C | D |
| 1 | $45,000 | $43,000 | $147,000 | - |
| 2 | 45,000 | 50,000 | - | - |
| 3 | 45,000 | 60,000 | - | $176,000 |
a. What is the
b. What is the
c. If the firm could reinvest the $147,000 earned in year 1 from investment C at 12%, would that affect your answers?
d. The payback method would select which investment? Why?
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