Question

Suppose that you have an opportunity to invest in your cousin’s burgeoning ecommerce business. If you were to invest $5,000 now, your cousin guarantees that you will receive the following cash flows: $3,000 at the end of 2 years, $2,000 at the end of 4 years, and $1,000 at the end of 6 years. In order to finance this investment, you would withdraw cash from your TFSA which is generating returns at a rate of 5% compounded annually. Determine (a) the Net Present Value of this investment opportunity, (b) what your net profit or loss on this investment would be, and (c) state whether or not this investment would be profitable. Round your answers to the nearest cent.

Answer 1

This decision should not be taken as it will have lower benefits, below is the answers to the queries -

(a) - NPV of this project will be - $5858.93 breakup is followed (NPV at the end of 2nd year - $2721.01, 4th year - 1645.41 & 6th year - 1492.43)

(b) - net profit or loss will be - $841.55 loss, details follow - total interest earned in 6 year in TFSA will be $1700.48, so total value will be $6700.48 and total NPV of the investment alternate is $858.93, so reducing this no from expected interest earned will be $841.55 loss.

(c) - as shown in above details this investment is not worthy to take.