Question

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.

Answer 1

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