A firm's cost of capital is 12 percent. The firm has three investments to choose among, the cash flow among each is followed:
Cash Inflows
A B C
Year
1 $395 ---- $1,241
2 $395 ---- -----
3 $395 ---- -----
4 ---- $1,749 -----
Each investment requires a $1,000 cash outlay, and investments B & C are mutually exclusive.
a. Which investment(s) should the firm make according to the net present values? Why?
b. Which investment(s) should the firm make to the internal rates of return? Why?
c. If all firms are reinvested at 15 percent, which investment(s) should the firm make? Would your answer be different if the reinvestment rate were 12 percent?