A risky $1,000 investment is expected to generate the following cash flows:
$\begin{array}{ll}
\text {Year }&1&2&3\&\$600&\$600&\$600
\end{array}$

a. If the firm's cost of capital is 10 percent, should the investment be made?
b. An alternative use for the $1,000 is a three-year U.S. Treasury note that pays $50 annually and repays the $1,000 at maturity for an annual risk-free return of 5 percent. Management believes that the cash inflows from the risky investment are only equivalent to 70 percent of the certain investment. Does this information alter the decision in (a)?

Question

​A risky $1,000 investment is expected to generate the following cash flows:
​ $\begin{array}{ll}
\text {Year }&1&2&3\&\$600&\$600&\$600
\end{array}$
 
a. If the firm's cost of capital is 10 percent, should the investment be made?
b. An alternative use for the $1,000 is a three-year U.S. Treasury note that pays $50 annually and repays the $1,000 at maturity for an annual risk-free return of 5 percent. Management believes that the cash inflows from the risky investment are only equivalent to 70 percent of the certain investment. Does this information alter the decision in (a)?

Quizplus · Accepted Answer

The Answer of ​A risky $1,000 investment is expected to generate the following cash flows:
​ $\begin{array}{ll}
\text {Year }&1&2&3\&\$600&\$600&\$600
\end{array}$
 
a. If the firm's cost of capital is 10 percent, should the investment be made?
b. An alternative use for the $1,000 is a three-year U.S. Treasury note that pays $50 annually and repays the $1,000 at maturity for an annual risk-free return of 5 percent. Management believes that the cash inflows from the risky investment are only equivalent to 70 percent of the certain investment. Does this information alter the decision in (a)?

​A Risky $1,000 Investment Is Expected to Generate the Following Year 123$600$600$600\begin{array}{ll}\text {Year }&1&2&3\\&\$600&\$600&\$600\end{array}Year ​1$600​2$600​3$600​

A Risky $1,000 Investment Is Expected to Generate the Following $\begin{array}{ll}\text {Year }&1&2&3\\&\$600&\$600&\$600\end{array}$