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In a case that A firm's cost of capital is 12 percent. The firm has three investments to choose among; the cash flows of each are as follows:                              Cash Inflows Year                                    A                                 B                          C 1                                       $395                             -                          $1,241 2                                       395                               -                             - 3                                      395                               -                              - 4                                      -                                    $1,749                    -   Each investment requires a $1,000 cash outlay, and investments B and C are mutually exclusive. a. Which investment(s) should the firm make according to the net present values? Why? b. Which investment(s) should the firm make according to the internal rates of return? Why? c. If all funds are reinvested at 15 percent, which investment(s) should the firm make? Would your answer be different if the reinvestment rate were 12 percent?

In a case that A firm's cost of capital is 12 percent. The firm has three investments to choose among; the cash flows of each are as follows:                              Cash Inflows Year                                    A                                 B                          C 1                                       $395                             -                          $1,241 2                                       395                               -                             - 3                                      395                               -                              - 4                                      -                                    $1,749                    -   Each investment requires a $1,000 cash outlay, and investments B and C are mutually exclusive. a. Which investment(s) should the firm make according to the net present values? Why? b. Which investment(s) should the firm make according to the internal rates of return? Why? c. If all funds are reinvested at 15 percent, which investment(s) should the firm make? Would your answer be different if the reinvestment rate were 12 percent?

Essentials Of Investments
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
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In a case that

A firm's cost of capital is 12 percent. The firm has three investments to choose among; the cash flows of each are as follows:

                             Cash Inflows

Year                                    A                                 B                          C

1                                       $395                             -                          $1,241

2                                       395                               -                             -

3                                      395                               -                              -

4                                      -                                    $1,749                    -

 

Each investment requires a $1,000 cash outlay, and investments B and C are mutually exclusive.

a. Which investment(s) should the firm make according to the net present values? Why?

b. Which investment(s) should the firm make according to the internal rates of return? Why?

c. If all funds are reinvested at 15 percent, which investment(s) should the firm make? Would your answer be different if the reinvestment rate were 12 percent?

 

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