In a case that A firm's cost of capital is 12 percent. The firm has three investments to choose among; the cash flows of each are as follows: Cash Inflows Year A B C 1 $395 - $1,241 2 395 - - 3 395 - - 4 - $1,749 - Each investment requires a $1,000 cash outlay, and investments B and C are mutually exclusive. a. Which investment(s) should the firm make according to the net present values? Why? b. Which investment(s) should the firm make according to the internal rates of return? Why? c. If all funds are reinvested at 15 percent, which investment(s) should the firm make? Would your answer be different if the reinvestment rate were 12 percent?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 13P

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In a case that

A firm's cost of capital is 12 percent. The firm has three investments to choose among; the cash flows of each are as follows:

Cash Inflows

Year A B C

1 $395 - $1,241

2 395 - -

3 395 - -

4 - $1,749 -

Each investment requires a $1,000 cash outlay, and investments B and C are mutually exclusive.

a. Which investment(s) should the firm make according to the net present values? Why?

b. Which investment(s) should the firm make according to the internal rates of return? Why?

c. If all funds are reinvested at 15 percent, which investment(s) should the firm make? Would your answer be different if the reinvestment rate were 12 percent?

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