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Investments Quick and Slow cost $1,000 each, are mutually exclusive, and have the following cash flows. The firm's cost of capital is 10 percent.

                                           Cash Inflows
                               Q                                 S
Year1                 $1,300                           $386
        2                    -                               386
        3                    -                               386
        4                    -                               386

a. According to the net present value method of capital budgeting, which investment(s) should the firm make?

b. According to the internal rate of return method of capital budgeting, which investment(s) should the firm make?

c. If Q is chosen, the $1,300 can be reinvested and earn 12 percent. Does this information alter your conclusions concerning investing in Q and S? To answer, assume that S's cash flows can be reinvested at its internal rate of return. Would your answer be different if S's cash flows were reinvested at the cost of capital (10 percent)?

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Accounting Basics, Accounting

Category:- Accounting Basics
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