Question

You have been offered a unique investment opportunity. If you invest

$ 8 comma 100$8,100

​today, you will receive

$ 405$405

one year from​ now,

$ 1 comma 215$1,215

two years from​ now, and

$ 8 comma 100$8,100

in ten years.a. What is the NPV of the opportunity if the cost of capital is

6.7 %6.7%

per​ year? Should you take the​ opportunity?b. What is the NPV of the opportunity if the cost of capital is

2.7 %2.7%

per​ year? Should you take it​ now?

a.

What is the NPV of the opportunity if the cost of capital is

6.7 %6.7%

per​ year?

If

the cost of capital is

6.7 %6.7%

per​ year, the NPV is

​$nothing.

​(Round to the nearest​ cent.)

Should you take the​ opportunity? ​(Select from the​ drop-down menu.)

You

▼

should

should not

take this opportunity.  b. What is the NPV of the opportunity if the cost of capital is

2.7 %2.7%

per​ year? If the cost of capital is

2.7 %2.7%

per​ year, the NPV is

​(Round to the nearest​ cent.)

Should you take it​ now? ​(Select from the​ drop-down menu.)

You

▼

should

should not

take this opportunity at the new cost of capital.

Answer 1

a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=405/1.067+1215/1.067^2+8100/1.067^10

=5681.65

NPV=Present value of inflows-Present value of outflows

=5681.65-8100

=-2418.35(Approx)(Negative)

Hence since NPV is negative;You should not take this opportunity.  

b.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=405/1.027+1215/1.027^2+8100/1.027^10

=7751.86

NPV=Present value of inflows-Present value of outflows

=7751.86-8100

=-348.14(Approx)(Negative)

Hence since NPV is negative;You should not take this opportunity at the new cost of capital.