The cost of capital for a firm is 10 percent. The firm has two possible

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The cost of capital for a firm is 10 percent.  The firm has two possible investments with the following cash inflows:

A                                 B

            Year 1                                                              $300                            $200

            Year 2                                                              200                             200

            Year 3                                                              100                             200

 

a. Each investment costs $480.  What investment(s) should the firm make according to net present value?

b. What is the internal rate of return for the two investments?  Which investment(S) should the firm make?  Is this the same answer you obtained in part a?

 

c. If the cost of capital rises to 14 percent, which investment(s) should the firm make?

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