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 Cost of investment—end 2020 25,000   Cost of investment—end 2020 $43,000 Cash inflow—2021 8,000   Cash inflow—2021 20,000 Cash inflow—2022 8,000   Cash inflow—

EBK CONTEMPORARY FINANCIAL MANAGEMENT
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Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section10.A: Mutually Exclusive Investments Having Unequal Lives
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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

Cost of investment—end 2020

25,000

 

Cost of investment—end 2020

$43,000

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

0

Cash inflow—2025

8,000

 

Cash inflow—2025

0

 

Requirements:

  • 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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