Problem 8 A firm has the following investment alternatives: Cash Inflows Year A
ID: 2715807 • Letter: P
Question
Problem 8
A firm has the following investment alternatives:
Cash Inflows
Year
A
B
C
1
$400
$----
$----
2
400
400
----
3
400
800
----
4
400
800
1,800
Each investment costs $1,400, and the firm's cost of capital is 10 percent.
a. What is each investment's internal rate of return?
b. Should the firm make any of these investments?
c. What is each investment's net present value?
d. Should the firm make any of these investments?
Year
A
B
C
1
$400
$----
$----
2
400
400
----
3
400
800
----
4
400
800
1,800
Explanation / Answer
Project A Particulars Year Cash Flows PVF @ 10% PV @ 10% PVF @ 5% PV @ 5% Cash Outflow 0 -1400 1.00 -1,400.00 1 -1400 Cash Inflow 1 400 0.91 363.64 0.95 380.95 Cash Inflow 2 400 0.83 330.58 0.91 362.81 Cash Inflow 3 400 0.75 300.53 0.86 345.54 Cash Inflow 4 400 0.68 273.21 0.82 329.08 Net Present Value -132.05 18.38 Project B Particulars Year Cash Flows PVF @ 10% PV @ 10% PVF @ 15% PV @ 15% Cash Outflow 0 -1400 1.00 -1,400.00 1.00 -1,400.00 Cash Inflow 1 0 0.91 - 0.87 - Cash Inflow 2 400 0.83 330.58 0.76 302.46 Cash Inflow 3 800 0.75 601.05 0.66 526.01 Cash Inflow 4 800 0.68 546.41 0.57 457.40 Net Present Value 78.04 -114.13 Project C Particulars Year Cash Flows PVF @ 10% PV @ 10% PVF @ 5% PV @ 5% Cash Outflow 0 -1400 1.00 -1,400.00 1 -1400 Cash Inflow 1 0 0.91 - 0.95 0 Cash Inflow 2 0 0.83 - 0.91 0 Cash Inflow 3 0 0.75 - 0.86 0 Cash Inflow 4 1800 0.68 1,229.42 0.82 1,480.86 Net Present Value -170.58 80.86 Particulars Project A Project B Project C Accept NPV -132.05 78.04 -170.58 Project B IRR 5.61 12.03 6.61 Project B