A friend of yours can invest in a multiyear project. The cost is $14,000.Annual cash flows are

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A friend of yours can invest in a multiyear project. The cost is $14,000.Annual cash flows are estimated to be $5,000 per year for six years but could vary between $2,500 and $7,000. Your friend estimates that the cost of capital (interest rate) is 11%, but it could be as low as 9.5% and as high as 12%. The basis of the decision to invest will be whether the project has a positive net present value. Construct a tornado diagram for this problem. On the basis of the tornado diagram, advise your friend regarding either (1) whether to invest or (2) what to do next in the analysis.

Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Cost Of Capital
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...
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Making Hard Decisions with decision tools

ISBN: 978-0538797573

3rd edition

Authors: Robert Clemen, Terence Reilly

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