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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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