An Investor Has the Opportunity to Invest in Four New

question 117

Multiple Choice

An investor has the opportunity to invest in four new retail stores. The amount that can be invested in each store, along with the expected cash flow at the end of the first year, the growth rate of the concern, and the cost of capital is shown for each case. It is assumed each investment will operate in perpetuity after the initial investment. Which investment should the investor choose?

• A) Initial investment: $100,000; Cash flow in year 1: $12,000; Growth Rate: 1.25%; Cost of Capital: 9.1%
• B) Initial investment: $90,000; Cash flow in year 1: $10,000; Growth Rate: 1.50%; Cost of Capital: 9.3%
• C) Initial investment: $80,000; Cash flow in year 1: $8,000; Growth Rate: 1.75%; Cost of Capital: 8.0%
• D) Initial investment: $60,000; Cash flow in year 1: $6,000; Growth Rate: 2.50%; Cost of Capital: 7.2%

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Definitions:

Compound Entry

An accounting entry that involves more than two accounts, where there are multiple debits and/or credits in a single transaction.

Trial Balance

A financial worksheet that consolidates all ledger balances into debit and credit columns, verifying the mathematical accuracy of a company's accounting system.

Income Statement

A financial report that shows a company's revenues, expenses, and net income over a specific period.

Accounts Payable

Liabilities of a business that are owed to creditors for goods and services purchased on credit.