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Category > Accounting Posted 07 May 2017 My Price 7.00

A firm’s cost of capital is 12 percent.

5. 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
 

A

B

C

Year 1

$395

-

$1,241

Year 2

$395

-

-

Year 3

$395

-

-

Year 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 percent values? Why?

 

 

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

 

 

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

Answers

Alpha Geek
(8)
Status NEW Posted 07 May 2017 09:05 AM My Price 7.00

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Attachments

file 1494150034-748632_1_636296391900678897_NPV.xlsx preview (93 words )
Ye-----------arC-----------ash-----------flo-----------wAB-----------CPV-----------(A)-----------PV(-----------B)P-----------V (-----------C )-----------Pre-----------sen-----------t V-----------alu-----------eCo-----------st -----------of -----------Cap-----------ita-----------lNe-----------t P-----------res-----------ent----------- Va-----------lue-----------IRR-----------Pre-----------sen-----------t V-----------alu-----------e @-----------15%-----------Ans-----------wer----------- a.----------- Pr-----------oje-----------ct -----------B s-----------hou-----------ld -----------be -----------sel-----------ect-----------ed -----------by -----------fir-----------m @-----------12%----------- co-----------st -----------of -----------cap-----------ita-----------l b-----------eca-----------use----------- It-----------s n-----------et -----------pre-----------sen-----------t v-----------alu-----------e i-----------s g-----------rea-----------ter----------- in----------- th-----------is -----------cas-----------e f-----------rom----------- ot-----------her----------- pr-----------oje-----------cts-----------Ans-----------wer----------- b.-----------Pro-----------jec-----------t C----------- sh-----------oul-----------d b-----------e s-----------ele-----------cte-----------d b-----------y f-----------irm----------- @I-----------RR -----------of -----------24.-----------10%----------- be-----------cau-----------se -----------hig-----------her----------- th-----------e I-----------RR -----------wil-----------l m-----------ake----------- mo-----------re -----------pro-----------fit-----------abl-----------e t-----------o f-----------irm----------- if----------- co-----------st -----------of -----------cap-----------ita-----------l w-----------oul-----------d l-----------ess----------- th-----------an -----------IRR-----------Ans-----------wer----------- c.-----------Pro-----------jec-----------t C----------- sh-----------oul-----------d b-----------e s-----------ele-----------cte-----------d
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