14. The Arabian Oil Company is considering an investment that can be undertaken this year or postponed one year. The investment cash flows if the investment is undertaken now would be as follows: period 0, −$100; period 1, $200. The cash flows if it is delayed one period would be as follows: period 1, −$100; period 2, $200. Assume a time value of money of 0.05. Should the company invest now or delay one year? First use the internal rate of return method and then use the net present value method.

Consider the following project: Period Net cash flow 0 -100 1 0 2 78.55 3 78.55 The internal rate of return is 20%. The NPV, assuming a 20% opportunity cost of capital, is exactly zero. Calculate the expected economic income and economic depreciation in each year. (Negative answers should be indicated by a minus sign. Do not round intermediate calculations. Round your answers to 2 decimal places.) 1 Period 2 3 Change in value (economic depreciation) (20.00) 54.55 65.46 Expected economic income

13. The IBC Company is considering undertaking an investment that promises to have the following cash flows Period 0 is = -$100  Period 1 is= $150  Period 2 is = $50 Period 3 is = $50 If it waits a year, it can invest in an alternative (that is, mutually exclusive) investment that promises to pay Period 1 Period 2 Period 3 −$150 $250 $50 Assume a time value of money of 0.05. Which investment should the firm undertake? Use the present value method and the internal rate of return approaches. With the IRR approach, use the incremental cash flows.

Solve Part B of the question