A business has two investment choices. Alternative 1 requires an immediate outlay of $2,000 and offers a return of $7,500 in eight years. Alternative 2 requires an immediate outlay of $3,000 in return for which $400 will be received at the end of every six months for the next eight years. The required rate of return on investment is 14% semi-annually. Compute the net present value of each alternative and determine which investment should be accepted or rejected according to the net present value criterion.

A business has two investment choices. Alternative 1 requires an immediate outlay of $2,000 and offers a return of $7,500 in eight years. Alternative 2 requires an immediate outlay of $3,000 in return for which $400 will be received at the end of every six months for the next eight years. The required rate of return on investment is 14% semi-annually. Compute the net present value of each alternative and determine which investment should be accepted or rejected according to the net present value criterion.

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

Section: Chapter Questions

Problem 3CMA

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