Suppose that you are investigating two mutual exclusive investments (investment A and B) which correspond to two listed firms A and B, respectively. The Net Cash Flows of these investments are the following: 

                       t₀                    t1             t2             t3 

A                  (10,000)     11,500          100         100

B                  (10,000)          0                  0        13,500

The risk free interest rate is 2% and the market portfolio return is 8%.

 The beta coefficient (systematic risk) for firm A and B is equal to 0.5 (i.e. b_A=b_B=0.5) 

a) Which investment would you proceed with according to the Net Present Value (NPV) and the Internal Rate of Return (IRR) investment appraisal techniques? Is there any difference in the  decisions made, based on the NPV and the IRR criteria? Explain. 

b) What is the range of interest rates for which the NPV and the IRR would coincide to the same  decision? 

Answer rating: 100% (QA)

Solution a Using the NPV technique we calculate the present value of the expected future cash flows ... View the full answer