No , S is still a betterinvestment S at 10% =1,544 (1 +.10)2 =1,544(1.21) = 1,868.24

Question

Investments Quick and Slow cost $1,000 each, are mutuallyexclusive, and have the
following cash flows. The firm's cost of capital is 10 percent.

                                           Cash Inflows
                               Q                                 S
Year1                 $1,300                           $386
        2                    —                               386
        3                    —                               386
        4                    —                               386
a. According to the net present value method of capital budgeting,which investment(s)
should the firm make?
b. According to the internal rate of return method of capitalbudgeting, which
investment(s) should the firm make?
c. If Q is chosen, the $1,300 can be reinvested and earn 12percent. Does this information
alter your conclusions concerning investing in Q and S? To answer,assume that S's cash
flows can be reinvested at its internal rate of return. Would youranswer be different if S's
cash flows were reinvested at the cost of capital (10 percent)?

Explanation / Answer

-------------------------------------------------------------------------------

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.