A risky $ 1,000 investment is expected to generate the following cash flows: Year 1 2 3 $600 $600 $600 a. If the firm's cost capital is 10 percent, should the investment be made? b. An alternative use for the $1,000 is a three-year U.S. Treasury note that pays $50 annually and repays the $1,000 at maturity for an annual risk-free return of 5 percent. Management believes that the cash inflows from the risky investment are only equivalent to 70 percent of the certain investment. Does this information alter the decision in (a)?
A risky $ 1,000 investment is expected to generate the following cash flows: Year 1 2 3 $600 $600 $600 a. If the firm's cost capital is 10 percent, should the investment be made? b. An alternative use for the $1,000 is a three-year U.S. Treasury note that pays $50 annually and repays the $1,000 at maturity for an annual risk-free return of 5 percent. Management believes that the cash inflows from the risky investment are only equivalent to 70 percent of the certain investment. Does this information alter the decision in (a)?
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter26: Capital Investment Analysis
Section: Chapter Questions
Problem 3CMA
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A risky $ 1,000 investment is expected to generate the following cash flows:
Year 1 2 3
$600 $600 $600
a. If the firm's cost capital is 10 percent, should the investment be made?
b. An alternative use for the $1,000 is a three-year U.S. Treasury note that pays $50 annually and repays the $1,000 at maturity for an annual risk-free return of 5 percent. Management believes that the
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