Question

Marian Cebrian owns his own business and is considering an investment. If he undertakes the investment, it will pay $6,840 at the end of each of the next 33 years. The opportunity requires an initial investment of $1,710 plus an additional investment at the end of the second year of $8,550. What is the NPV of this opportunity if the interest rate is 2.6% per year? Should Marian take it?

Select one:

a. The NPV is $9,665. Yes, he should take it.

b. The NPV is $9,665. No, he should not take it.

c. The NPV is -$9,665. Yes, he should take it.

d. The NPV is -$9,665. No, he should not take it.

Answer 1

Ans a. The NPV is $9,665. Yes, he should take it.

NPV = Present Value of Cash Inflow - Present Value of Cash Outflow

= 6840* PVAF(2.6%, 33 years) - 1710 - PVF(2.6%,2 year)

= 19497.46 - 1710 - 8122.15

= $9665

Since NPV is positive, Yes he should take it.

Annuity PV Factor =	6840 * ( 1 - ((1 / (1 + 2.6%)^3)))
	2.6%
Annuity PV Factor =	506.9339221
	0.026
Annuity PV Factor =	19497.46

PVF(2.6%,2 year)

=8550/(1.026^2)

Correction: Cash inflow is 3 years instead of 33 years as provided in question.

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