which investment(s) should be accepted?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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The Emu Manufacturing Company is considering five independent investment opportunities. The required investment outlays and expected internal rates of return (IRR) for these investments are shown below. The firm's cost of capital is 14% and its target optimal capital structure is a debt ratio of 30%. Internally generated funds totalling $900,000 are available for all investment opportunities.

 

 

 

 

(i) Based on the IRR method, which investment(s) should be accepted?

(ii) If the company were to undertake all acceptable investments, what amount should be paid out in dividends according to the residual dividend policy?

(iii) What would be the amount of external finance required if the company were to undertake all acceptable investments?

 
Investment
Investment Cost
IRR (%)
A
$275,000
17.5
$325,000
$550,000
$350,000
B
15.7
C
14.3
D
13.2
E
$400,000
11.8
Transcribed Image Text:Investment Investment Cost IRR (%) A $275,000 17.5 $325,000 $550,000 $350,000 B 15.7 C 14.3 D 13.2 E $400,000 11.8
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