A company has identified the following investments as looking promising. Each requires an initial investment of $1.2 million. Which is the best investment?
A) a perpetuity that generates a cash flow at the end of year 1 of $100,000, has a growth rate of 1.25%, and a cost of capital of 11.0%
B) a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 11.8%
C) an investment that generates a cash flow of $400,000 at the end of each of the next five years, when the cost of capital is 6.1%
D) an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 6.1%

Question

Quizplus · Accepted Answer

B) 11ea84dc_f559_194f_9a63_0f19825b82bf_TB1316_00_TB1316_00 NPV (A) = -1.2 + 0.1 / (0.11 - 0.0125) = -$0.174 million
NPV (C) = using a financial calculator = 0.480 million
NPV (D) = using a financial calculator = $0.265 million

A Company Has Identified the Following Investments as Looking Promising