The following investment opportunities are available to an investment center man
ID: 2435104 • Letter: T
Question
The following investment opportunities are available to an investment center manager:
Project Initial Investment Annual Earnings
A $800,000 $90,000
B 100,000 20,000
C 300,000 25,000
D 400,000 60,000
1.) If the investment manager is currently making a return on investment of 16%, which project(s) would the manager went to pursue? Show work/jusity answer.
2.) If the cost of capital is 10% and the annual earnings approximate cash flows excluding financ charges, which project(s) should be chosen?
3.) Suppose only one project can be chosen and the annual earnings approximate cash flows excluding finance charges. Which project should be chosen and why?
Explanation / Answer
1.) If the investment manager is currently making a return on investment of 16%, which project(s) would the manager went to pursue? Show work/ jusity answer. Project Initial Investment Annual Earnings Return on Investment A $800,000 $90,000 11.25% B 100,000 20,000 20% C 300,000 25,000 8.33% D 400,000 60,000 15% The Manager will like to pursue Project A, which will give highest ROI of 20%. 2.) If the cost of capital is 10% and the annual earnings approximate cash flows excluding finance charges, which project(s) should be chosen? As the Annual earnings in case of Project C, is less than finance charges, it should not be chosen. Remaining Projects should be chosen in order of B, D and A. 3.) Suppose only one project can be chosen and the annual earnings approximate cash flows excluding finance charges. Which project should be chosen and why? If only one Project is to be Chosen, project B has highest ROI, but Project A has highest Annual earnings. One of these can be selected.
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