# Question: A firm has the following investment alternatives Each investment costs 3 000

A firm has the following investment alternatives:

Each investment costs $3,000; investments B and C are mutually exclusive, and the firm’s cost of capital is 8 percent.

a. What is the net present value of each investment?

b. According to the net present values, which investment(s) should the firm make? Why?

c. What is the internal rate of return on each investment?

d. According to the internal rates of return, which investment(s) should the firm make? Why?

e. According to both the net present values and internal rates of return, which investments should the firm make?

f. If the firm could reinvest the $3,600 earned in year 1 from investment B at 10 percent, what effect would that information have on your answer to part e? Would the answer be different if the rate were 14 percent?

g. If the firm’s cost of capital had been 10 percent, what would be investment A’s internal rate of return?

h. The payback method of capital budgeting selects which investment? Why? (Review Chapter 19, if necessary.)

Each investment costs $3,000; investments B and C are mutually exclusive, and the firm’s cost of capital is 8 percent.

a. What is the net present value of each investment?

b. According to the net present values, which investment(s) should the firm make? Why?

c. What is the internal rate of return on each investment?

d. According to the internal rates of return, which investment(s) should the firm make? Why?

e. According to both the net present values and internal rates of return, which investments should the firm make?

f. If the firm could reinvest the $3,600 earned in year 1 from investment B at 10 percent, what effect would that information have on your answer to part e? Would the answer be different if the rate were 14 percent?

g. If the firm’s cost of capital had been 10 percent, what would be investment A’s internal rate of return?

h. The payback method of capital budgeting selects which investment? Why? (Review Chapter 19, if necessary.)

## Answer to relevant Questions

The chief financial officer has asked you to calculate the net present values and internal rates of return of two $50,000 mutually exclusive investments with the following cash flows: If the firm’s cost of capital is 9 ...Management of a firm with a cost of capital of 12 percent is considering a $100,000 investment with annual cash flow of $44,524 for three years. a. What are the investment’s net present value and internal rate of ...A risky $30,000 investment is expected to generate the following cash flows: The probability of receiving each cash inflow is 90, 80, and 70 percent, respectively. If the firm’s cost of capital is 12 percent, should the ...HBM, Inc. had sales of $10 million and a net profit margin of 7 percent in 20X0. Management expects sales to grow to $12 million and $14 million \in 20X1 and 20X2, respectively. Management wants to know if additional funds ...The following structure of interest rates is given: Term of Loan Interest Rate 1 year....... 3% 2 years....... 4% 5 years....... 6% 10 years....... 8% Your firm needs $2,000 to finance its assets. Three possible ...Post your question