A firm is considering investing in the following two mutually exclusive projects: Year A B 0 -260000
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Question:
A firm is considering investing in the following two mutually exclusive projects:
| Year | A | B |
| 0 | -260000 | -350000 |
| 1 | 120000 | 100000 |
| 2 | 140000 | 130000 |
| 3 | 100000 | 200000 |
| 4 | 50000 | 50000 |
The firm has an opportunity cost of capital of 9%,
(a) Explain opportunity cost of capital.
(b) Calculate the net present value (NPV) projects A and B.
(c) Estimate the internal rate of return for projects A and B.
(d) Based on your results for (b) and (c) which investment project(s) should the company invest in? Explain your decision.
(d) Critically assess the usefulness of the internal rate of return criterion for investment appraisal.
(e) Explain why the additivity property of NPV is useful when selecting investment projects where funds are limited.
Expert Answer:
SOLUTION a The opportunity cost of capital refers to the return that could be earned from an alternative investment with similar risk It represents th... View the full answer
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