Investments a and B Are Mutually Exclusive and Cost $2,000

question 34

Essay

Investments A and B are mutually exclusive and cost $2,000 each. The firm's cost of capital is 9%, and the investments' estimated cash inflows are​ $\begin{array} { c c c c } & \text { cash inflow } & A & B \\\text { year } & & & \\1 & \$ 2,320 & \cdots \\2 & \cdots & \cdots \\3 & \cdots & \$ 2,810\end{array}$
a. What investment(s) should the firm make according to net present value?
b. What investment(s) should the firm make according to internal rate of return?
c. If the firm can reinvest funds earned in year 1 at 10%, which investment(s) should the firm make?

---

Definitions:

Equity in Subsidiary Earnings

The portion of income attributable to the parent company from its investment in subsidiaries, after intercompany transactions have been eliminated.

Consolidated Financial Statements

Financial statements that integrate the accounting information of a parent company and its subsidiaries, presenting it as one single entity.

Amortization

The method of incrementally expensing the original cost of an intangible asset over the period it is expected to be used.

Net Income

The total earnings of a company after all expenses and taxes have been deducted from total revenue, indicating the company's profit.