Question

Hsu, Inc. is considering two investment opportunities. Each investment costs $9,000 and will provide the same total future cash inflows. The schedule of estimated cash receipts for each investment follows (assume cash is received at year-end):

Investment I           Investment II

Year 1                    $3,000                             $1,000

Year 2                      2,500                               2,000

Year 3                      2,000                               3,000

Year 4                     1,500                              3,000

Total                       $9,000                             $9,000

21.        Which investment should Hsu choose, assuming all other features for the two investments are the same?

		a.     Hsu should be indifferent between the two investments because they provide the same total cash inflows.
		b.    Hsu should choose Investment I because of the time value of money.
		c.     Hsu should be indifferent between the two investments because the initial cash outflow is the same.
		d.    Hsu should choose Investment II because it generates larger cash inflows at the end of the investment’s useful life.

22.        Assuming an 8 percent minimum rate of return, what is the net present value of Investment II (round to the nearest whole dollar)?

Answer 1

		Investment 1	Investment 2
	Cash Outflow	$9,000	$9,000
	Cash Inflow
	Year 1	$3,000	$1,000
	year 2	$2,500	$2,000
	Year 3	$2,000	$3,000
	Year 4	$1,500	$3,000
		$9,000	$9,000
21	Which investment should Hsu choose, assuming all other features for the two investments are the same
	Hsu should choose Investment I because of the time value of money	Answer B
	Explain With Example
a	As Both Investment having Overall Same Cash Inflow but when we consider time value of money concept
	cash inflow higher in initial years shows Higher Present value of cash Inflow
b	Example We taking Pv of 10%				Present value
	Cash Inflow	PV of 10%	Investment 1	Investment 2		Investment 1	Investment 2
	Year 1	0.909	$3,000	$1,000		$2,727	$909
	year 2	0.826	$2,500	$2,000		$2,065	$1,652
	Year 3	0.751	$2,000	$3,000		$1,502	$2,253
	Year 4	0.683	$1,500	$3,000		$1,025	$2,049
						$7,319	$6,863
		Present Value of Cash inflow higher in Investment 1 with time value concept
22	Assuming an 8 percent minimum rate of return, what is the net present value of Investment II
					Present value
	Cash Inflow	PV of 8% (2)	Investment 2    (3)		Investment 2 ( 4 = 2 *3)
	Year 1	0.926	$1,000		$926
	year 2	0.857	$2,000		$1,714
	Year 3	0.794	$3,000		$2,382
	Year 4	0.735	$3,000		$2,205
					$7,227
	Net Present value = PV of Cash Inflow - PV of cash inflow
		7227 - 9000	($1,773)