Solve each of the follow: Two mutually exclusive investments cost $10,000.00 eac

Question

Solve each of the follow:

Two mutually exclusive investments cost $10,000.00 each and have the following cash inflows. The firm's cost of capital is 10%.

INVESTMENT

A. What is the net present Value of each investment?

B. What is the internal rate of return of each investment?

C. Which investment(s) should the firm make?

D. Would your answers be different to C if the funds received in Year 2 for investment A could be reinvested at 16%?

SHOW WORK.

Cash Inflow A. B.    Year 1 - - Year 2 $15,407.00 - Year 3 - - Year 4 - $19,390

Explanation / Answer

Project B should be chosen asit is having higher NPV

Particulars Year Cash Flow A PVF @ 10% PV Project A PVF @ 25% PV Project A Cash Outflow 0 -10000 1 -10000 1 -10000 Cash Inflow 2 15407                   0.83              12,733 0.64                 9,860 Net Present value 2733.057851 -139.52 IRR = 10%+14.27 i.e 24.27% Particulars Year Cash Flow A PVF @ 10% PV Project B PVF @ 25% PV Project B Cash Outflow 0 -10000 1 -10000 1 -10000 Cash Inflow 4 19390                   0.68              13,244 0.4096                 7,942 Net Present value 3243.6309 -2057.856 IRR = 10%+9.18 i.e 9.18%

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