A firm has the following investment alternatives (refer to image): Each investment costs $3,000; investments B and C are mutually exclusive, and the firm’s cost of capital is 8 percent. a.) According to the internal rates of return, which investment(s) should the firm make? Why? b.) According to both the net present values and internal rates of return, which investments should the firm make? c.) If the firm could reinvest the $3,600 earned in year 1 from investment B at 10 percent, what effect would that information have on your answer to part b? Would the answer be different if the rate were 14 percent?

Corporate Financial Accounting
14th Edition
ISBN:9781305653535
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Carl Warren, James M. Reeve, Jonathan Duchac
Chapter13: Statement Of Cash Flows
Section: Chapter Questions
Problem 13.3APR
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A firm has the following investment alternatives (refer to image):

Each investment costs $3,000; investments B and C are mutually exclusive,
and the firm’s cost of capital is 8 percent.


a.) According to the internal rates of return, which investment(s) should the firm make? Why?


b.) According to both the net present values and internal rates of return, which investments should the firm make?


c.) If the firm could reinvest the $3,600 earned in year 1 from investment B at 10 percent, what effect would that information have on your answer to part b? Would the answer be different if the rate were 14 percent?

Cash Inflows
A
B
Year 1
$1,100
$3,600
2
1,100
3
1,100
$4,562
Transcribed Image Text:Cash Inflows A B Year 1 $1,100 $3,600 2 1,100 3 1,100 $4,562
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