Each project has a 10-year life span with no residual value. The initial investment on each is $15,000. The Weighted Average Cost of Capital (WACC) is 5% for each project as well. The difference between the projects is cash flows. • Project 1 has a steady stream of cash flows, $2,000 annually throughout its life. • Project 2’s cash flows start with $2,450 per year but decrease by $100 per year throughout its life. • Project 3 starts with $1,550 in year one but increases by $100 per year throughout its life. Using the NPV method, determine which investment is the better capital investment and please explain why.
Each project has a 10-year life span with no residual value. The initial investment on each is $15,000. The Weighted Average Cost of Capital (WACC) is 5% for each project as well. The difference between the projects is cash flows. • Project 1 has a steady stream of cash flows, $2,000 annually throughout its life. • Project 2’s cash flows start with $2,450 per year but decrease by $100 per year throughout its life. • Project 3 starts with $1,550 in year one but increases by $100 per year throughout its life. Using the NPV method, determine which investment is the better capital investment and please explain why.
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
Section: Chapter Questions
Problem 1PS
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Each project has a 10-year life span with no residual value. The initial investment on
each is $15,000. The Weighted Average Cost of Capital (WACC) is 5% for each project
as well. The difference between the projects is cash flows.
• Project 1 has a steady stream of cash flows, $2,000 annually throughout its life.
• Project 2’s cash flows start with $2,450 per year but decrease by $100 per year
throughout its life.
• Project 3 starts with $1,550 in year one but increases by $100 per year
throughout its life.
Using the NPV method, determine which investment is the better capital investment and
please explain why.
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