Problem
You are deciding between two investments in the healthcare field. Each investment is projected to produce the following cash flows:
Investment One
|
Year
|
Cash
|
|
0
|
-$150,000
|
|
1
|
$10,000
|
|
2
|
$8,000
|
|
3
|
$25,000
|
|
4
|
$50,000
|
|
5
|
$25,000
|
|
6
|
$50,000
|
Investment Two
|
Year
|
Cash
|
|
0
|
-$100,000
|
|
1
|
0
|
|
2
|
0
|
|
3
|
0
|
|
4
|
0
|
|
5
|
$54,000
|
|
6
|
$65,000
|
Task
1. Assume a discount rate of 5%. Which investment would you prefer? Why?
2. How would your analysis change if you assumed 3% inflation per year?
3. If investment one was riskier than investment two, how would your calculations change so that additional risk is taken into account? Also, does this new information change your project preference?