A low-risk, 4-year investment opportunity promises to pay $3,000, $6,000, and $5,000 at the end of the first, second and fourth year, respectively. A cash injection of $1,000 is required at the end of the third year. The investment may be purchased for $10,000, which would have to be borrowed at an effective interest rate of 10%. Use Economic Value Added principle to determine whether the investment should be undertaken.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Example: Evaluating a business investment opportunity
• A low-risk, 4-year investment
opportunity promises to pay $3,000,
$6,000, and $5,000 at the end of the
first, second and fourth year,
respectively. A cash injection of $1,000
is required at the end of the third year.
The investment may be purchased for
$10,000, which would have to be
borrowed at an effective interest rate of
10%. Use Economic Value Added
principle to determine whether the
investment should be undertaken.
Transcribed Image Text:Example: Evaluating a business investment opportunity • A low-risk, 4-year investment opportunity promises to pay $3,000, $6,000, and $5,000 at the end of the first, second and fourth year, respectively. A cash injection of $1,000 is required at the end of the third year. The investment may be purchased for $10,000, which would have to be borrowed at an effective interest rate of 10%. Use Economic Value Added principle to determine whether the investment should be undertaken.
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