Nowhere Bus Lines (NBL) is considering two alternative buses to transport people from the commuter lot to the main campus. Bus S has a cost of $50,000 and will produce end-of-year net cash flows of $25,000 per year for 3 years. Bus L will cost $75,000 and will produce cash flows of $23,000 per year for the next 6 years. The company must provide bus service for 6 years, after which it plans to give up its franchise and to cease operating the route. Inflation is not expected to affect either costs or revenues during the next 6 years. If NBL's cost of capital is 15 percent, by what amount will the better project change the company's value?
The cash flow for Bus S will be as follows:
Year Cash flow
3 -25,000 25,000 (from operations) - 50,000 (purchase of bus)
This solution evaluates alternative investment options.
Types of alternative investment vehicles and derivatives
1. What are the different types of alternative investment vehicles?
2. Which one is the most preferable? Why?
3. What are derivatives?
4. How can they be used to manage a portfolio? Would you personally use derivatives in your portfolio? Why or Why not? (at least 350 words).