A firm has the following investment alternatives. Each cost$10,000 and has the following cash inflows. $$\begin{array}{l}
\text { Cash flow Year }\
\begin{array} { c c c c c }
& 1 & 2 & 3 & 4 \
\text { Investment } A & \$ 4,000 & 4,000 & 4,000 & 4,000 \
B & \$ 3,600 & 3,800 & 4,200 & 4,600
\end{array}
\end{array}$$ Investment A is considered to be typical of the firm's investments, but investment B's cash flows are less certain. The firm's cost of capital is 8 percent, but the financial manager uses a hurdle rate of 6 percent for less risky projects and 10 percent for riskier projects.
a. Based on the cost of capital, which investment(s) should be made?
b. If the financial manager uses the risk-adjusted cost of capital, which investment(s) should be made?
c. Would the answers to (a) and (b) be different if the two investments were not mutually exclusive?

Question

​A firm has the following investment alternatives. Each cost$10,000 and has the following cash inflows.​ $$\begin{array}{l}
\text { Cash flow Year }\
\begin{array} { c c c c c } 
& 1 & 2 & 3 & 4 \
\text { Investment } A & \$ 4,000 & 4,000 & 4,000 & 4,000 \
B & \$ 3,600 & 3,800 & 4,200 & 4,600
\end{array}
\end{array}$$ Investment A is considered to be typical of the firm's investments, but investment B's cash flows are less certain. The firm's cost of capital is 8 percent, but the financial manager uses a hurdle rate of 6 percent for less risky projects and 10 percent for riskier projects. 
a. Based on the cost of capital, which investment(s) should be made?
b. If the financial manager uses the risk-adjusted cost of capital, which investment(s) should be made?
c. Would the answers to (a) and (b) be different if the two investments were not mutually exclusive?

Quizplus · Accepted Answer

The Answer of ​A firm has the following investment alternatives. Each cost$10,000 and has the following cash inflows.​ $$\begin{array}{l}
\text { Cash flow Year }\
\begin{array} { c c c c c } 
& 1 & 2 & 3 & 4 \
\text { Investment } A & \$ 4,000 & 4,000 & 4,000 & 4,000 \
B & \$ 3,600 & 3,800 & 4,200 & 4,600
\end{array}
\end{array}$$ Investment A is considered to be typical of the firm's investments, but investment B's cash flows are less certain. The firm's cost of capital is 8 percent, but the financial manager uses a hurdle rate of 6 percent for less risky projects and 10 percent for riskier projects. 
a. Based on the cost of capital, which investment(s) should be made?
b. If the financial manager uses the risk-adjusted cost of capital, which investment(s) should be made?
c. Would the answers to (a) and (b) be different if the two investments were not mutually exclusive?

​A Firm Has the Following Investment Alternatives Investment a Is Considered to Be Typical of the Firm's

A Firm Has the Following Investment Alternatives Investment a Is Considered to Be Typical of the Firm's