Question

# You are considering an investment opportunity with the following costs and benefits. The applicable interest rate...

You are considering an investment opportunity with the following costs and benefits. The applicable interest rate for this investment opportunity is 7.5% (effective annual rate). Calculate the NPV of this investment opportunity. Round your answer to two decimals (do not include the \$-sign in your answer).

Investment Opportunity Cash Flows in \$

 Year 0 1 2 3 4 5 6 7 8 Costs \$(14000) \$(10,000) \$(5,000) \$(1,000) \$(1,000) \$ - \$ - \$ - \$ - Benefits \$ - \$1,000 \$5,000 \$10,000 \$10,000 \$7,500 \$5,000 \$1,000 \$500

Here,

PVF = Present Value Factor

PV = Present Value

NPV = Present value of cash inflow - Present value of cash outflow.

(amount in \$)

 Year Cash outflow (a) Cash inflow (b) Net cash flow (c) [b-a] PVF (d) PV of Cashflow (c*d) 0 (14000) 0 (14000) (1/1.075)0 = 1 (14000) 1 (10000) 1000 (9000) (1/1.075)1 = 0.93 (8370) 2 (5000) 5000 0 (1/1.075)2 = 0.87 0 3 (1000) 10000 9000 (1/1.075)3 = 0.80 7200 4 (1000) 10000 9000 (1/1.075)4 = 0.75 6750 5 0 7500 7500 (1/1.075)5 = 0.70 5250 6 0 5000 5000 (1/1.075)6 = 0.65 3250 7 0 1000 1000 (1/1.075)7 = 0.60 600 8 0 500 500 (1/1.075)8 = 0.56 280 NPV 960

Hence, the NPV of investment opportunity is \$960, which they should accept it.

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