Question

You have been offered a unique investment opportunity. If you invest $ 10 800 ​today, you will receive $ 540 one year from​ now, $ 1 620 two years from​ now, and $ 10 800 ten years from now. a. What is the NPV of the opportunity if the cost of capital is 5.9 % per​ year? Should you take the​ opportunity? b. What is the NPV of the opportunity if the cost of capital is 1.9 % per​ year? Should you take it​ now?

Answer 1

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

=540/1.059+1620/1.059^2+10800/1.059^10

=$8042.29

NPV=Present value of inflows-Present value of outflows

=$8042.29-$10800

=($2757.71)(Approx)(Negative).

Hence since NPV is negative;opportunity must not be taken.

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

=540/1.019+1620/1.019^2+10800/1.019^10

=$11037.17

NPV=Present value of inflows-Present value of outflows

=$11037.17-$10800

=$237.17(Approx).

Hence since NPV is positive;opportunity must be taken.