You are heading up your firm's capital investment evaluation efforts. Currently, the capital investment group is deliberating over the three investment proposals below. They are not mutually exclusive. Your company uses a 12% annual rate to discount cash flows for NPV. The following table presents the costs of each investment (negative values in time zero) and the expected cash flows for each investment each year.
time period Investment A Investment B Investment C
0 (today) -500 -2000 -500
1 200 400 300
2 300 500 200
3 400 800 100
4 500 900
1. Calculate the payback period for each investment.
2. Calculate the IRR for each investment.
3. Calculate the NPV for each investment.
4. Which investments, if any, would you recommend to your firm? Why?
5. Do you see any possible sources of distortion in the evaluation results above for these projects? Explain.
This solution is comprised of a detailed explanation of firm's capital investment evaluation.