Two mutually exclusive investments cost $10,000 each and have the following cash

Question

Two mutually exclusive investments cost $10,000 each and have the following cash inflows. The firm’s cost of capital is 12%.

                        Investment
Cash inflow             A             B
Year 1              $12,407         -----
Year 2                 ------           -----
Year 3                ------            ------
Year 4                -------         $19,390

D.    Would your answers be different to C if the funds received in Year 1 for investment A could be reinvested at 16%? Show your work.

Question C for reference (Which investment(s) should the firm make?)

Explanation / Answer

12,407 *(1.16)^3= 19,366. So investment B will still be preferred, but only slightly.

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