Evaluate the following capital investments accordingto net present value. Each alternative requires an initia l investmentof $20,000. Assume a I 0% cost of capital. Which is the preferredinvestment? YEARCASH FLOWFROMINVESTMENT 1 INVESTMENT 2 INVESTMENT 3CASH FLOWCASH FLOWFROMFROM1.$ 1,000$ 7,000$ 10,00021,0006,0005,00033,0005,0003,000415,0004,0002,0003,0004,0001,0001,0004,0001,00074,0001,00081,0002,0001,000n6

Cost of capital = 10% Year Cash Flow - 1 Cash Flow - 2 Cash Flow - 3 0 -20,000 -20,000 -20,000…

YEAR CASH FLOW FROM INVESTMENT 1 INVESTMENT 2 INVESTMENT 3 CASH FLOW CASH FLOW FROM FROM 1. $ 1,000 $ 7,000 $ 10,000 2 1,000 6,000 5,000 3 3,000 5,000 3,000 4 15,000 4,000 2,000 3,000 4,000 1,000 1,000 4,000 1,000 7 4,000 1,000 8 1,000 2,000 1,000 n6

YEAR CASH FLOW FROM INVESTMENT 1 INVESTMENT 2 INVESTMENT 3 CASH FLOW CASH FLOW FROM FROM 1. $ 1,000 $ 7,000 $ 10,000 2 1,000 6,000 5,000 3 3,000 5,000 3,000 4 15,000 4,000 2,000 3,000 4,000 1,000 1,000 4,000 1,000 7 4,000 1,000 8 1,000 2,000 1,000 n6

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

Problem 1PS

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Question

Evaluate the following capital investments according
to net present value. Each alternative requires an initia l investment
of $20,000. Assume a I 0% cost of capital. Which is the preferred
investment?

YEAR
CASH FLOW
FROM
INVESTMENT 1 INVESTMENT 2 INVESTMENT 3
CASH FLOW
CASH FLOW
FROM
FROM
1.
$ 1,000
$ 7,000
$ 10,000
2
1,000
6,000
5,000
3
3,000
5,000
3,000
4
15,000
4,000
2,000
3,000
4,000
1,000
1,000
4,000
1,000
7
4,000
1,000
8
1,000
2,000
1,000
n6

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

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