Module 6 Discussion Forum

# Module 6 Discussion Forum - Problem#7 A firm has two \$1,000...

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Problem #6 Two mutually exclusive investments cost \$10,000 each and have the following cash inflows. The firm's cost of capital is 12 percent. Investment Cash inflow year: A B 1 \$12,407 - 2 - - 3 - - 4 - \$19,390 a. What is the net present value of each investment? Investment A - \$1,077.68 Investment B - \$2.322.70 b. What is the internal rate of return of each investment? Investment A – 24.07% Investment B – 18.00% c. Which investment(s) should the firm make? At the end of 4 yrs. investment B is the option with the net present value. So, go with investment B. d. Would your answers be different to (c) if the funds received in year 1 for investment A could be reinvested at 12 percent? @12% reinvested – NPV for investment A is \$1,078, so investment B is still better. @16% reinvested – NPV for investment A is \$2,307, so investment B is still better. @20% reinvested – NPV for investment A is \$3,625, so investment A is better.

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Unformatted text preview: Problem #7 A firm has two \$1,000, mutually exclusive investment alternatives with the following cash inflows. The cost of capital is 6 percent. Cash Inflow Year A B 1 \$175 \$1,100 2 \$175-3 \$175-4 \$175-5 \$175-6 \$175-7 \$175-8 \$175-a. What is the internal rate of return on each investment? Investment A 8.2% Investment B 10% Which investment should the firm make? Based on the IRR, Investment B b. What is the net present value of each investment? Investment A - \$87 Investment B - \$38 Which investment should the firm make? Investment A has the higher NPV, so go with Investment A. c. If the cash inflows can be reinvested at 8 percent, which investment should be made? Investment A - \$87 Investment B - \$183 Investment B has the higher NPV, so go with Investment B....
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