Problem: A firm is considering two mutually exclusive investments, each with an ititial outlay of 100,000 dollars and an expected life of 3 years. Assume that the firm has a cost of capital of 10 % for each project The 2 investments are of equal risk and have the following cash flows
investment A investment B
year 0 100,000 100,000
year 1 40,000 55,000
year 2 50,000 55,000
year 3 110,000 55,000
1) Calculate the payback period and the net present value for each investment. Show all of your calculations
Based on the NPV and payback period calculations, which investment should the firm choose?
2) What is the basic relationship between interest rates and bond prices and why does this relationship exsist
3) Why is prefered stock condidered to be a hybrid security?