Suppose you have an investment opportunity that costs you $130,000 today and will yield payoffs of $50,000 at the end of the 2nd year, 3rd year, and 4th year. Will you invest your $130,000 on this investment opportunity today if the interest rate is 10%? Your answers should include the calculations as well as the final answer. Video Problem Walk-Through: Computing the Present Value of a Firm's Investment Project in ch 27 will show you step-by-step
Solution :-
To Decide Whether to invest or not we need to compute net Present Value , If Net Present Value is greater than or equal to Zero than invest otherwise not
= [ $50,000 / ( 1 + 0.10 )2 ] + [ $50,000 / ( 1 + 0.10 )3 ] + [ $50,000 / ( 1 + 0.10 )4 ] - $130,000
= ( $50,000 * 0.826 ) + ( $50,000 * 0.751 ) + ( $50,000 * 0.683 ) - $130,000
= - $16,961.27
As the NPV of the Project means less than equal to Zero , So do not invest in the Project
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