Investment A:
| Year: |
0 |
1 |
2 |
3 |
4 |
5 |
| Cash flow: |
-$14,000 |
$6,000 |
$6,000 |
$6,000 |
$6,000 |
$6,000 |
Investment B:
| Year: |
0 |
1 |
2 |
3 |
4 |
5 |
| Cash flow: |
-$15,000 |
$7,000 |
$7,000 |
$7,000 |
$7,000 |
$7,000 |
Investment C:
| Year: |
0 |
1 |
2 |
3 |
4 |
5 |
| Cash flow: |
-$18,000 |
$12,000 |
$4,000 |
$4,000 |
$4,000 |
$4,000 |
The cash flows for three projects are shown above. The cost of capital is 7.5%. If an investor decided to take projects with a payback period of two years or less, which of these projects would he take?
| none of these investments |
Flag this QuestionA lottery winner can take $6 million now or be paid $600,000 at the end of each of the next 16 years. The winner calculates the internal rate of return (IRR) of taking the money at the end of each year and, estimating that the discount rate across this period will be 6%, decides to take the money at the end of each year. Was her decision correct?
| Yes, because it agrees with the Net Present Value rule. |
| No, because it disagrees with the Net Present Value rule. |
| Yes, because it agrees with the payback rule. |
| Yes, because it agrees with both the Net Present Value rule and the payback rule. |
Flag this QuestionMary is in contract negotiations with a publishing house for her new novel. She has two options. She may be paid $100,000 up front, and receive royalties that are expected to total $26,000 at the end of each of the next five years. Alternatively, she can receive $200,000 up front and no royalties. Which of the following investment rules would indicate that she should take the former deal, given a discount rate of 8%?
Rule I: The Net Present Value rule
Rule II: The Payback Rule with a payback period of two years
Rule III: The internal rate of return (IRR) Rule
