1. A firm is considering three mutually exclusive expansion projects. Their initial cost is the same for the three of them in a value of €12,000, and the minimum required rate of return for the firm is 10%. The excpected cash flows for each project are: Years Project A Project B Project C 3 €6,500 5 1 4 €6,500 €4,000 €6,500 €4,000 €4,000 €4,000 €4,000 a) Which of the investments will the firm choose using: > Payback method > NPV IRR b) Would your response change if the firm's funds are unlimited? Explain.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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1. A firm is considering three mutually exclusive expansion projects. Their initial cost is the
same for the three of them in a value of €12,000, and the minimum required rate of
return for the firm is 10%. The excpected cash flows for each project are:
Years
Project A
Project B
Project C
1
2
3
4
5
€6,500
€6,500
€6,500
€4,000
€4,000
€4,000
€4,000
€4,000
a) Which of the investments will the firm choose using:
> Payback method
> NPV
IRR
b) Would your response change if the firm's funds are unlimited? Explain.
Transcribed Image Text:1. A firm is considering three mutually exclusive expansion projects. Their initial cost is the same for the three of them in a value of €12,000, and the minimum required rate of return for the firm is 10%. The excpected cash flows for each project are: Years Project A Project B Project C 1 2 3 4 5 €6,500 €6,500 €6,500 €4,000 €4,000 €4,000 €4,000 €4,000 a) Which of the investments will the firm choose using: > Payback method > NPV IRR b) Would your response change if the firm's funds are unlimited? Explain.
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