A firm has the following investment alternatives. Each costs $13,000 and has the following cash inflows. Investment
Question:
Investment A is considered to be typical of the firms investments. Investment Bs cash flows vary over time but are considered to be less certain. Investment Cs cash flows diminish over time but because most of the cash flows occur early in the investments life, they are considered to be more certain. The firms cost of capital is 10 percent, but the financial manager uses a hurdle rate of 8 percent for less-risky projects and 12 percent for riskier projects.
a. Based on the cost of capital, should any of the investments be made?
b. If the financial manager uses a risk-adjusted cost of capital, should any of the investments be made?
c. Would the answers to a and b be different if the three investments were mutually exclusive?
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Basic Finance An Introduction to Financial Institutions Investments and Management
ISBN: 978-1111820633
10th edition
Authors: Herbert B. Mayo