A firm has two $1,000, mutually exclusive investment alternatives with the following cash inflows. The cost of capital is 6 percent.
Year A B
1 $175 $1,100
2 $175 –
3 $175 –
4 $175 –
5 $175 –
6 $175 –
7 $175 –
8 $175 –
a. What is the internal rate of return on each investment? Which investment should the firm make?
b. What is the net present value of each investment? Which investment should the firm make?
c. If the cash inflows can be reinvested at 8 percent, which investment should be made?
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