### Investment decision rule problems

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Question 1. A \$25 investment produces \$27.50 at the end of the year with no risk. If the OCC = 10% annually is this a good investment?

Question 2. The Wilson Landscaping Company can purchase a piece of equipment for \$3,600 today. The asset has a two-year life, will produce a cash flow of \$600 in the first year and \$4,200 in the second year. The interest rate is 15%. Calculate the project's IRR and NPV. Should the project be taken?

Question 3. You are offered an investment opportunity that costs you \$28,000, has an NPV of \$2278, lasts for three years, and produces the following cash flows:

If the OCC = 10% what is the missing cash flow?

Question 4: Rarig Inc. will generate cash flows of \$30,000 in year one, and \$65,000 in year two. However, if they make an additional immediate investment of \$20,000, they can expect to have cash streams of \$55,000 in year 1 and \$63,000 in year 2 instead. The OCC = 9% annually. Using the incremental cash flows calculate the NPV of the proposed project. Why would the IRR be a poor choice in this situation?

Question 5. Carlson Development owns a prime parcel of land that can be developed into a residential, commercial, or industrial complex. Carlson plans to manage each of the projects for seven years and then cash out. After considerable research, Carlson estimates that cash flows from the three alternative projects are as follows:
Carlson estimates that all three projects have an opportunity cost of capital of 15% per year. Calculate the NPV and IRR on the three projects identify which (if any) project should Carlson select?

Now assume that the opportunity cost of capital is 17% instead of 15%. Calculate the NPV and the IRR for each of the three projects based on the new 17% opportunity cost of capital and identify which (if any) project should Carlson select?

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