Question

# Freefall, Inc., has two independent investment opportunities, each requiring an initial investment of \$65,000. The company’s...

1. Freefall, Inc., has two independent investment opportunities, each requiring an initial investment of \$65,000. The company’s required rate of return is 8 percent. The cash inflows for each investment are provided as follows.

1. Without resorting to calculations, which investment will have the highest net present value? Explain.
2. Calculate the net present value for each investment (remember to include the initial investment cash outflow in your calculation). Should the company invest in either investment? Round to the nearest dollar.

a. Investment Y , will have the highest NPV because Increasing time period decrease the present value factor and decreasing time period increases the present value factor, due to this present value increases or decreases

b. Investment Y

 Year Cash flow PVF(8%, n year) Present value 0 (65000) 1 (65000) 1 35000 0.926 32410 2 25000 0.857 21425 3 15000 0.794 11910 4 5000 0.735 3675 Net present Value \$4420

Investment Z

 Year Cash flow PVF(8%, n year) Present value 0 (65000) 1 (65000) 1 5000 0.926 4630 2 15000 0.857 12855 3 25000 0.794 19850 4 35000 0.735 25725 Net present Value (\$1940)

The company should invest in Investment Y as its NPV is higher than the Investment Z