1. An investor has the opportunity to invest in four new retail stores. The amou

Question

1.     An investor has the opportunity to invest in four new retail stores. The amount that can be invested in each store, along with the expected cash flow at the end of the first year, the growth rate of concern, and the cost of capital is shown for each case. It is assumed the investment will operate in perpetuity after the initial investment. Which investment should the investor choose?

a.       Init Invest: $100,000, CF year 1: $12,000, Growth rate: 1.25%, Cost of capital: 9%

b.      Init Invest: $90,000, CF year 1: $10,000, Growth rate: 1.50%, Cost of capital: 9%

c.       Init Invest: $80,000, CF year 1: $8,000, Growth rate: 1.75%, Cost of capital: 8%

d.      Init Invest: $60,000, CF year 1: $6,000, Growth rate: 2.50%, Cost of capital: 7.5%

Explanation / Answer

D. CF/(r-g)-init invest.

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