Question: You have two mutually exclusive projects that you have been asked to evaluate and make a recommendation. Assume that investors opportunity cost of capital is
You have two mutually exclusive projects that you have been asked to evaluate and make a recommendation. Assume that investors opportunity cost of capital is 10% for both projects. Their cash flow projections are as follows:
| Today | Time 1 | Time 2 | Time 3 | Time 4 | Time 5 | |
| Investment 1 | -$500,000 | $50,000 | $150,000 | $250,000 | $350,000 | $450,000 |
| Investment 2 | -$500,000 | $250,000 | $250,000 | $200,000 | $150,000 | $100,000 |
Assume that there is a 50% likelihood of another valuable investment opportunity becoming available in two years. If it is available, the investment would require an initial investment of $250,000 at time 2. Does this alter your choice? Clearly state your assumptions. Under what assumptions might you choose the otherwise inferior investment today?
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