The Riverside Company is evaluating two mutually exclusive assets: Black and White, at the end of 2020. The firm's weigh cost of capital is 8%. Data for each project are as follows: Black White 25,000 Cost of investment-end $43,000 Cost of investment–end 2020 020 Cash inflow-2021 8,000 Cash inflow-2021 20,000 Cash inflow-2022 8,000 Cash inflow-2022 30,000 Cash inflow-2023 8,000 Cash inflow-2023 10,000 Cooh inflou 2004 0. 000 Conh inflou 2004

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
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Chapter1: Investments: Background And Issues
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Problem 4-1
The Riverside Company is evaluating two mutually exclusive assets: Black and White, at the end of 2020. The firm's weighted average
cost of capital is 8%. Data for each project are as follows:
Black
White
25,000
Cost of investment-end
$43,000
Cost of investment-end
2020
2020
Cash inflow-2021
8,000
Cash inflow-2021
20,000
Cash inflow-2022
8,000
Cash inflow-2022
30,000
Cash inflow-2023
8,000
Cash inflow-2023
10,000
Cash inflow-2024
8,000
Cash inflow-2024
Cash inflow-2025
8,000
Cash inflow-2025
Requirements:
• Compute the net present value for each asset using Excel's NPV function.
• Determine which project the Riverside Company should invest in based on NPV.
Compute the profitability index for each project.
• Determine which project the Riverside Company should invest in based on the profitability index.
• Should the firm invest in the Black or White project? What is the basis for your choice?
Transcribed Image Text:Problem 4-1 The Riverside Company is evaluating two mutually exclusive assets: Black and White, at the end of 2020. The firm's weighted average cost of capital is 8%. Data for each project are as follows: Black White 25,000 Cost of investment-end $43,000 Cost of investment-end 2020 2020 Cash inflow-2021 8,000 Cash inflow-2021 20,000 Cash inflow-2022 8,000 Cash inflow-2022 30,000 Cash inflow-2023 8,000 Cash inflow-2023 10,000 Cash inflow-2024 8,000 Cash inflow-2024 Cash inflow-2025 8,000 Cash inflow-2025 Requirements: • Compute the net present value for each asset using Excel's NPV function. • Determine which project the Riverside Company should invest in based on NPV. Compute the profitability index for each project. • Determine which project the Riverside Company should invest in based on the profitability index. • Should the firm invest in the Black or White project? What is the basis for your choice?
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