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Consider the following three investment options:

Investment 1: Invest $10,000 today and get $15,000 three years from now.

Investment 2: Invest $10,000 today and get $5,000 at the end of each of the next three years.

Investment 3: Invest $10,000 today and get $2,500 at the end of every six months for three years. If the cash flows from these investments have the same degree of uncertainty, which investment should you choose? Why?

2. Suppose you have an opportunity to invest $1,000 today and get $1,200 one year from today. If your required rate of return on investments of similar risk is 10%, should you make this investment? Why?

3. Suppose you have the opportunity to invest in a project that provides you with $4,000 every year forever. If you require an 8% return on investments with similar risk, what is the most you would be willing to pay for this project?

4. Island Corporation invested $1,000,000 in a new product on January 1, 2020. This product generated cash flows of $800,000 the first year, $400,000 the second year, and $200,000 the third year. At the end of the third year, Island abandoned the new product and disposed of the production equipment for $400,000 at the end of the third year. If these are the only cash flows from this new product, what was Island's return on their investment in this product?

5. You are evaluating an investment project of Finfine Project, with the following cash flows:

Period Cash Flow

0 −$100,000

1 35,027

2 35,027

3 35,027

4 35,027

Calculate the following questions independently and justify each result:

a. Payback period

b. Discounted payback period, assuming a 10% cost of capital

c. Discounted payback period, assuming a 16% cost of capital

d. Net present value, assuming a 10% cost of capital

e. Net present value, assuming a 16% cost of capital

f. Profitability index, assuming a 10% cost of capital

g. Profitability index, assuming a 16% cost of capital

h. Internal rate of return

i. Modified internal rate of return, assuming reinvestment at 0%

j. Modified internal rate of return, assuming reinvestment at 10%

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