Question

A risky $400,000 investment is expected to generate the following cash flows:
a. If the firm’s cost of capital is 10 percent, should the investment be made?
b. An alternative use for the $400,000 is a four-year U.S. Treasury bond that pays $28,000 annually and repays the $400,000 at maturity.
Management believes that the cash inflows from the risky investment are equivalent to only 75 percent of the certain investment, which pays 7 percent. Does this information alter the decision in a?


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  • CreatedMarch 19, 2015
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