Question

You have been offered a unique investment opportunity. If you invest $11,700 ?today, you will receive...

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

$11,700 ?today, you will receive $585 one year from? now, $1,755 two years from? now, and $11,700 ten years from now.

a. What is the NPV of the opportunity if the cost of capital is 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 %per? year? Should you take it? now?

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Homework Answers

Answer #1

a.

NPV of Project = Present Value of Cash Inflow - Present Value of cash Outflow

= [ $ 585 * 1/( 1.067) ^ 1 + $ 1755* 1/( 1.067) ^ 2 + $ 11700* 1/( 1.067) ^ 10 ] - 11,700

= $ 8206.83 - $ 11700

= - $ 3493.17

Hence the correct answer is - $ 3493.17

No.This is because the investment has a negative NPV.

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b.

NPV of Project = Present Value of Cash Inflow - Present Value of cash Outflow

= [ $ 585 * 1/( 1.027) ^ 1 + $ 1755* 1/( 1.027) ^ 2 + $ 11700* 1/( 1.027) ^ 10 ] - 11,700

= $ 11,197.13 - $ 11700

= - $ 502.87

Hence the correct answer is - $ 502.87

No.This is because the investment has a negative NPV.

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