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Reika [66]
3 years ago
14

Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 i

n Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent but Rich demands a return of 12.5 percent. Who, if either, should accept this project?A) Joe, but not RichB) Rich, but not JoeC) Neither Joe nor RichD) Both Joe and RichE) Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zero
Business
1 answer:
miv72 [106K]3 years ago
8 0

Both Joe and Rich should accept this project.

D) Both Joe and Rich

<u>Explanation:</u>

NPVJoe= $25,500 + $15,800 / 1.085 + $15,300 / 1.085^2

NPVJoe= $2,058.88

NPVRich= –$25,500 + $15,800 / 1.125 + $15,300 / 1.125^2

NPVRich= $633.33

Here Joe and Rich both invested a total amount of $25,500 and they are expected to get cash inflows of $15,800 and $15,300 in the year 1 and year 2 respectively they both has their own different rates of return i.e. 8.5% and 12.5% so we can calculate the net principle value of Joe is $2,058.88 and that of Rich is $633.33.

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