A firm has the following investment alternatives. Each one lasts a year.
The firm’s cost of capital is 7 percent. A and B are mutually exclusive, and B and C are mutually exclusive.
a. What is the net present value of investment A? Investment B? Investment C?
b. What is the internal rate on investment A? Investment B? Investment C?
c. Which investment(s) should the firm make? Why?
d. If the firm had unlimited sources of funds, which investment(s) should it make? Why?
e. If there were another alternative, investment D, with an internal rate of return of 6 percent, would that alter your answer to part d? Why?
f. If the firm’s cost of capital rose to 10 percent, what effect would that have on investment A’s internal rate of return?

  • CreatedMarch 19, 2015
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