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Marian Plunket owns her own business and is considering an investment. If she undertakes the​ investment,...

Marian Plunket owns her own business and is considering an investment. If she undertakes the​ investment, it will pay $ 5 comma 040 at the end of each of the next 3 years. The opportunity requires an initial investment of $ 1 comma 260 plus an additional investment at the end of the second year of $ 6 comma 300. What is the NPV of this opportunity if the interest rate is 1.9 % per​ year? Should Marian take​ it?

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Answer #1

Initial investment= $1,260

Cash flow in year 1= $5,040

Cash flow in year 2= $5,040 - $6,300 = -$1,260

Cash flow in year 3= $5,040

Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

  • Press the CF button.
  • CF0= -$1,260. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
  • Cash flow for each year should be entered.
  • Press Enter and down arrow after inputting each cash flow.
  • After entering the last cash flow cash flow, press the NPV button and enter the interest rate of 1.9%.
  • Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 1.9% interest rate is $7,235.88.

Marian should take the investment since it generates a positive net present value.

In case of any query, kindly comment on the solution.

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