Company A has an internal cost of capital of 7% annually. It is evaluating its investment options against its internal costs and has identified three potential investments: Investment A: Bond with annual returns of 8% Investment B: Bond with annual returns of 4% Investment C: Bond with annual returns of 12%

Company A has an internal cost of capital of 7% annually. It is evaluating its investment options against its internal costs and has identified three potential investments:

Investment A: Bond with annual returns of 8%

Investment B: Bond with annual returns of 4%

Investment C: Bond with annual returns of 12%

Which of the above investments should the company consider taking on given its internal cost of capital?

Select one:

a. A only

b. C only

c. A and C only

d. B only

Answer:

The answer is c. A and C only.

Explanation:

The company should consider investment A (bond with annual returns of 8%) and investment C (bond with annual returns of 12%) because both of these investments have annual returns (8% and 12%, respectively) that are higher than the company’s internal capital cost, and would ensure that the company makes profit/gain, no matter how little.