Get Rich Corporation has to choose between two investment opportunities. Investment A requires an immediate cash outlay of $100,000 and provides after-tax income of $20,000 per year for 10 years. Investment B requires an immediate cash outlay of $1,000 and generates after-tax income of $350 per year for five years.
1. Using a cost of capital of 12%, calculate the net present value of each investment, and determine which one Get Rich should select.
2. Calculate the internal rate of return of each investment. On the basis of this method, which investment should Get Rich select?
3. Interpretive Question: How do you account for the difference in rankings? Under the circumstances, which method would you rely on for your decision?
Please see the attached file.
Part a: Since NPV of the project A is higher and positive, we should select the project A based on NPV ...
This solution is comprised of a detailed, step-wise response which compares the internal rate of return and the net present value methods. An Excel file is attached and contains the calculations which pertain to this problem.