Simmons Investment Group (SIG) used Excel to determine the net present value, th

Question

Simmons Investment Group (SIG) used Excel to determine the net present value, the present value index, and the internal rate of return of two investment alternatives. A summary of the results is shown below:

a. invest in Alternative 1 because it has a higher net present value.

b. invest in Alternative 2 because it has a higher internal rate of return.

c. invest in Alternative 1 because the cost of the investment is higher.

d. invest in Alternative 2 because the cost of the investment is lower.

Alternative 1 Alternative 2   Cost of the investment $ 426,000   Cost of the Investment $ 311,000   Net Present Value (NPV) $    11,120   Net Present Value (NPV) $ 9,450   Present Value Index 1.27   Present Value Index (NPV) 1.32   Internal Rate of Return (IRR) 10%   Internal Rate of Return (IRR) 11%

SIG has $430,000 to invest. Assuming there are no other investment opportunities available, SIG should

a. invest in Alternative 1 because it has a higher net present value.

b. invest in Alternative 2 because it has a higher internal rate of return.

c. invest in Alternative 1 because the cost of the investment is higher.

d. invest in Alternative 2 because the cost of the investment is lower.

Explanation / Answer

Answer :- Option a). invest in Alternative 1 because it has a higher net present value (NPV).

Explanation :- The investment alternative which has high net present value will be selected by Simmons Investment Group (SIG). Accordingly, Alternative 1 is to be considered i.e., Investment should be made by Simmon Investment Group (SIG) in alternative 1 only because the net present value (NPV) of alternative 1 is more than that of the alternative 2.

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