Corporate Finance

Running Head : Investment Decision

A company is considering the following investment opportunities

Investment A B C

Initial Cost millions 5 .5 3 .0 2 .0

Expected Life 10 yrs 10 yrs 10 yrs

NPR 15 340 ,000 300 ,000 200 , 00

IRR 20 30 40

a . If the company can raise large amount of money at an annual cost of 15 percent , and the investments are independent of one another , which should it undertake

b . If the company can raise large amount of money at an annual cost of

15 percent , and the investments are mutually exclusive , which should it undertake

c . If the company has fixed capital budget of 5 .5 million , and if the investments are independent of one another , which should it undertake

Name

University

Course

Date

Investment Decision

The decision is for investments A , B and C

With independent investments and unlimited capital

Using IRR

The higher the IRR , the better the project (Esader , 2003

Therefore the projects should be undertaken as C , B and A respectively

Using NPR

The higher the NPR the better the investment

Therefore the investments should be undertaken as A , B and C respectively

With unlimited capital and mutually exclusive investments

Using IRR

The higher the IRR the better the investment

Therefore investment C should be undertaken

Using NPR

The higher the NPR the better the project

Therefore investment A should be undertaken

With fixed capital of 5 .5 million and the investments being independent

Using IRR

Investment C should be undertaken fully

Investment B should also be undertaken fully

Investment A can be undertaken to tune of 0 .5 million , which is the residue of the fixed capital after funding C and B fully or ignored

REFERENCE

Esader , M (2003 . Fundamentals of Business Finance . Prentice Hall London

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