1. Consider the following two projects Project A: Costs $10,000 today. Increases

Question

1. Consider the following two projects Project A: Costs $10,000 today. Increases profit by $4000 next year and $7,200 the year after that Project B: Costs $6000 today. Increases profit in two years by $6678 A firm faces a rate to borrow money of 8% and has the option of investing money with almost no risk at 6%. a) If the firm has $20,000 on hand, with only these two project to choose from, will they invest in A, B, neither or both? Show the calculations that lead to your conclusions. Explain whether you answers would be different for either project if the firm had no money on hand to invest. (2 points)

Explanation / Answer

Percent of project A profit against investment: 1200 / 10000 = 12 %............. Percent of project profit B profit against investment: 678 / 6000 = 11.3 %................ If the risk is similar then the money should be invested in project A only.

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