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Your firm has identified three potential investment projects. The projects and their cash flows are shown here: Cash Flow Today (millions) -$10 $5 $20 Cash Flow in One Year (millions) $20 $5 -$10 Project Suppose all cash flows are certain and the risk-free interest rate is 10%. a. What is the NPV of each project? b. If the firm can choose only one of these projects, which should it choose based on the NPV decision rule? c. If the firm can choose any two of these projects, which should it choose based on the NPV decision rule? ABC

Your firm has identified three potential investment projects. The projects and their cash flows are shown here: Cash Flow Today (millions) -$10 $5 $20 Cash Flow in One Year (millions) $20 $5 -$10 Project Suppose all cash flows are certain and the risk-free interest rate is 10%. a. What is the NPV of each project? b. If the firm can choose only one of these projects, which should it choose based on the NPV decision rule? c. If the firm can choose any two of these projects, which should it choose based on the NPV decision rule? ABC

Essentials Of Investments
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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Your firm has identified three potential investment projects. The projects and their cash flows are shown here: Cash Flow Today (millions) -$10 $5 $20 Cash Flow in One Year Project (millions) $20 $5 -$10 Suppose all cash flows are certain and the risk-free interest rate is 10%. a. What is the NPV of each project? b. If the firm can choose only one of these projects, which should it choose based on the NPV decision rule? c. If the firm can choose any two of these projects, which should it choose based on the NPV decision rule? ABC
Transcribed Image Text:Your firm has identified three potential investment projects. The projects and their cash flows are shown here: Cash Flow Today (millions) -$10 $5 $20 Cash Flow in One Year Project (millions) $20 $5 -$10 Suppose all cash flows are certain and the risk-free interest rate is 10%. a. What is the NPV of each project? b. If the firm can choose only one of these projects, which should it choose based on the NPV decision rule? c. If the firm can choose any two of these projects, which should it choose based on the NPV decision rule? ABC
Expert Solution
Step 1

Answer a)

Project A

Given:

Cash flow Today = -$10Cash flow in one year =$20Risk free interest rate =10% i.e. 0.10

NPV of Project A =-10+201+0.1= -10 +201.1=-10+18.18=8.18

Project B

Given:

Cash flow Today = $5Cash flow in one year =$5Risk free interest rate =10% i.e. 0.10

NPV of Project B =5+51+0.1=5 +51.1=5+4.545=9.545

Project C

Given:

Cash flow Today = $20Cash flow in one year =-$10Risk free interest rate =10% i.e. 0.10

NPV of Project B =20-101+0.1=20 -101.1=20-9.090=10.909

 

 

 

 

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