Use the information for the question(s)below.

-Of the following four mutually exclusive investments, which is the best investment?
A)Initial investment: $1.1 million; Cash flow in year 1: $160 000; Annual Growth Rate: 2%; Cost of Capital: 9.0%
B)Initial investment: $1.2 million; Cash flow in year 1: $150 000; Annual Growth Rate: 2%; Cost of Capital: 7.0%
C)Initial investment: $1.3 million; Cash flow in year 1: $160 000; Annual Growth Rate: 1%; Cost of Capital: 6%
D)Initial investment: $1.4 million; Cash flow in year 1: $150 000; Annual Growth Rate: 2%; Cost of Capital: 8%

Question

Use the information for the question(s)below.
 
-Of the following four mutually exclusive investments, which is the best investment?
A)Initial investment: $1.1 million; Cash flow in year 1: $160 000; Annual Growth Rate: 2%; Cost of Capital: 9.0% 
B)Initial investment: $1.2 million; Cash flow in year 1: $150 000; Annual Growth Rate: 2%; Cost of Capital: 7.0% 
C)Initial investment: $1.3 million; Cash flow in year 1: $160 000; Annual Growth Rate: 1%; Cost of Capital: 6% 
D)Initial investment: $1.4 million; Cash flow in year 1: $150 000; Annual Growth Rate: 2%; Cost of Capital: 8%

Quizplus · Accepted Answer

Investment C offers the lowest cost of capital at 6%, which means the discount rate for future cash flows is the lowest among the options. Despite having a lower growth rate and a higher initial investment, the lower cost of capital makes it more favorable as it implies a higher net present value (NPV) for the investment, making it the best choice among the given options.

Use the Information for the Question(s)below