The cost of capital for a firm is 10 percent. The firm has twopossible investmen

Question

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

                             A                     B
Year 1 $300                  $200
2                           200                   200
3                           100                   200

a. Each investment costs $480. What investment(s) should the firmmake 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?

Explanation / Answer

x.X

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