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A firm has the following investment alternatives. Each one lasts ayear.

Investment A
B
C

Cash inflow $1,150
$560
$600

Cash outflow $1,000
$500
$500


The firm's cost of capital is 7 percent. A and B are mutuallyexclusive, and B and C are mutually exclusive.

What is the net present value of investment A? Investment B?Investment C?
What is the internal rate on investment A? Investment B? InvestmentC?
Which investment(s) should the firm make? Why?
If the firm had unlimited sources of funds, which investment(s)should it make? Why?
If there were another alternative, investment D, with an internalrate of return of 6 percent, would that alter your anser toquestion (d)? Why?
If the firm's cost of capital rose to 10 percent, what effect wouldthat have on investment A's internal rate of return?

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Hubert Koch
Hubert KochLv2
30 Sep 2019

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Problem 1

All Techniques- Decision among mutually exclusive investments. Pound industries is attempting to select the best of three mutually exclusive projects. The initial investment and after tax cash inflows associated with these projects are shown in the following table

Cash flow Project A Project B Project C

Initial investment (CF) $80,000 $110,000 $110,000

Cash inflows (CF), T=1 to 5 $25,000 $37,000 $38,500

Calculate the payback period for each project

Calculate the net present value (NPV) of each project, assuming that the fimrm has a cost of capital equal to 11%

Calculate the internal rate of return (IRR) for each project

Indicate which project you would recommend

A-the payback period of project A is ___years

the payback period of project B is ___years

the payback period of project C is ___years

B-the NPV of project A is $____

the NPV of project B is $____

the NPV of project C is $____

C- The IRR of project A is _____

The IRR of project B is _____

The IRR of project C is _____

D- which project would you recommend?

Project A

Project B

Project C

Problem 2

IRR, investment life, and cash inflows Oak enterprise accepts projects earning more than the firms 15% cost of capital. Oak is currently considering a 10 year project that provides annual cash inflows of $50,000 and requires an initial investment of $328,300

Deter the IRR of the project is it acceptable

Assuming that the cash inflos continue to be $50,000 per year how many additional years would the flows have to continue to make the project acceptable (that is, to make it have an IRR of 15%?

A. the project IRR is ___%

Is the project acceptable?

Yes or no

B. assuming that the cash inflows continue to be $50,000 per year the number of additional years the flows would have to continue to make the project acceptable at the 15% discount rate is ____ additional years

C) with the given life, initial investment and cost of capital the minimum annual cash inflow that the firm should accept is $______

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