Question

The cash flows for four investments have been identified as follows:

Investment	A	B	C	D
Cash Flow Today in thousands of dollars	-8.0	-12.7	-6.0	-2.2
Cash Flow in One Year in thousands of dollars	9.4	14.3	7.05	2.59

Based on the above information, and with an interest rate of 5%, which is the best investment?

		A) Investment A
		B) Investment B
		C) Investment C
		D) Investment D

Answer 1

A) Investment A

Working:

When Cash inflows and cash outflows are given for different periods, then such projects are evaluated on the basis of Net Present Value.
			A	B	C	D
Cash Flow in One Year in thousands of dollars		a	9.4	14.3	7.05	2.59
Present value of 1		b=1.05^-1	0.952381	0.952381	0.952381	0.952381
Present value of cash flows in thousand of dollars		c=a*b	8.95	13.62	6.71	2.47
Cash Flow Today in thousands of dollars		d	-8.0	-12.7	-6.0	-2.2
Net Present Value in thousand of dollars		c+d	0.95	0.92	0.71	0.27
Since Project A has highest Net Present Value, investment in Project A is advised here.