Thomas Inc.has two independent investment opportunities,each requiring an initial investment of $15,000.The company's hurdle rate is 14 percent.The cash inflows for each investment are provided below.
$\begin{array}{crc}
& \text { Investment A } & \text { Investment B } \
\text { Year 1 } & \$ 20,000 & \$ 70,000 \
\text { Year 2 } & 30,000 & 50,000 \
\text { Year 3 } & 50,000 & 40,000 \
\text { Year 4 } & 70,000 \
\text { Total inflows } & \$ 170,000 & 10,000 \
\end{array}$
Without making any calculations,which investment will have the higher net present value?

Question

Thomas Inc.has two independent investment opportunities,each requiring an initial investment of $15,000.The company's hurdle rate is 14 percent.The cash inflows for each investment are provided below.
$\begin{array}{crc} 
& \text { Investment A } & \text { Investment B } \
\text { Year 1 } & \$ 20,000 & \$ 70,000 \
\text { Year 2 } & 30,000 & 50,000 \
\text { Year 3 } & 50,000 & 40,000 \
\text { Year 4 } & 70,000 \
\text { Total inflows } & \$ 170,000 & 10,000 \
\end{array}$
Without making any calculations,which investment will have the higher net present value?

Quizplus · Accepted Answer

Investment B will have a higher net present value because it generates most of its cash inflows early on, which means the cash flows can be reinvested sooner at the hurdle rate, enhancing the investment's value.

Thomas Inc Without Making Any Calculations,which Investment Will Have the Higher Net