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CH 7 Your brother wants to borrow $ 10,000 from you. He has offered to pay...

CH 7

Your brother wants to borrow $ 10,000 from you. He has offered to pay you back $ 12,750 in a year. If the cost of capital of this investment opportunity is 12 %​, what is its​ NPV? Should you undertake the investment​ opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

If the cost of capital of this investment opportunity is 12%​, what is its​ NPV?

The NPV of the investment is ______

​$nothing

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Answer #1

So, the NPV of the investment is :- $ 1383.93

IRR = 27.50% ( The rate at which the NPV of the investment will be zero)

So, as the cost of capital is 12% and IRR is 27.5% , thus maximum deviation allowable in the cost of capital estimate to leave the decision unchanged will be 15.5% which is (27.5% -12% ).

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