A company is considering the following investment opportunities.
Investment A B C
Initial cost ($ millions) 5.5 3.0 2.0
Expected life 10 years 10 years 10 years
NPV @15% $340,000 $300,000 $200,000
IRR 20% 30% 40%
a) If the company can raise large amounts of money at an annual cost of 15 percent, and if
the investments are independent of one another, which should it undertake?
b) If the company can raise large amounts of money at an annual cost of 15 percent, and if
the investments are mutually exclusive, which should it undertake?
c) Considering only these three investments, if the company has a fixed capital budget of
$5.5 million, and if the investments are independent of one another, which should it
undertake?