Cost of Capital = 9.5%
Initial investment = $950,000
Year 1 cash flow = $300,000 Year 2 cash flow = $200,000 Year 3 cash flow = $200,000 Year 4 cash flow = $600,000 Year 5 cash flow = $500,000
Investment 2 has the following profile:
Cost of Capital = 9.5%
Initial Investment = $950,000
Year 1 cash flow = $400,000 Year 2 cash flow = $400,000 Year 3 cash flow = $500,000 Year 4 cash flow = $150,000 Year 5 cash flow = $150,000
1. What is the payback period for Investments 1 and 2?
2. What is the net present value of Investments 1 and 2?
3. What is the internal rate of return for investments 1 and 2?
4. Which investment would you choose and why?
Would you choose a different option if the cost of capital was 18%?