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:

Transition Phase

A period of change in which something transforms from one state or phase to another, often marked by significant shifts or developments.

Systematic Way

An organized and consistent method or approach to accomplishing tasks or solving problems.

Exploratory Phase

An initial stage in research or project development focused on investigating, experimenting, or gathering preliminary data without a predetermined outcome or hypothesis.