An investor is faced with the problem of choosing among 2 investment opportunities that have the following deterministic cash flow streams and the interest rate is constant at 5% per year. A = (-25, 5, 10, 15), B = (-20, 20, 5) a) Which investment would you choose according to the net present value criteria? b) What is the internal rate of return of B? c) How would your answer change in part a) if there is a term structure of interest rates so that the spot rates are s1 = 5%, s2 = 8% and s3 = 10%?

An investor is faced with the problem of choosing among 2 investment opportunities that have the following deterministic cash flow streams and the interest rate is constant at 5% per year. A = (-25, 5, 10, 15), B = (-20, 20, 5) a) Which investment would you choose according to the net present value criteria? b) What is the internal rate of return of B? c) How would your answer change in part a) if there is a term structure of interest rates so that the spot rates are s1 = 5%, s2 = 8% and s3 = 10%?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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