## Question

# Your firm is facing two investment opportunities and deciding which is a better one. Both investments have a time horizon of 10 years. Investment A

Your firm is facing two investment opportunities and deciding which is a better one. Both investments have a time horizon of 10 years.

Investment A requires an initial cash outflow in the amount of $200,000. No cash inflows are expected in the first three years. Starting the fourth year, the investment is expected to generate $70,000 per year of cash inflows till the end of the investment period.

Investment B requires an initial cash outflow in the amount of $200,000 and is expected to generate $40,000 per year in each of the next 10 years.

The discount rate is 8% per year and expected to remain constant over the investment horizon.

a. Based on a net present value approach, which is a better investment? **Show all your calculations**.

b. Based on a payback period approach, which is a better investment? **Show all your calculations.**

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