Question 1: A firm has three investment opportunities. Each costs $1,000, and the firm's cost of capital is 10 percent. The cash inflow of each investment is as follows:
Cash Inflow A B C
Year
1 300 500 100
2 300 400 200
3 300 200 400
4 300 100 500
a. If the net present value method is used, which investment(s) should the firm make?
b. What is the internal rate of return of investment A? The internal rate of return of investment B is 10.22% and 6.15% for investment C Which investment(s) should the firm make?
c. What is the payback period for each investment?
Question 2: A firm needs $100 to start and expects:
Sales $200
Expenses $185
Tax rate 33% of earnings
a. What are earnings if the owners put up the $100?
b. If the firm borrows $40 of the initial at 10%, what are the profits received by the owner?
c. What is the return on the owners' investment in each case? Why do the returns differ?
d. If expenses rise to $194, what will be the returns in each case?
e. In which case did the returns decline more?
f. What generalization can you draw form the above?