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You are offered the following investment opportunity: • Invest $425 today • Receive $100 at the...

You are offered the following investment opportunity: • Invest $425 today • Receive $100 at the end of Year 1; receive $200 at the end of year 3, and receive $350 at the end of Year 6 • You want to earn a required return of 13% Required: a) Should you invest in this opportunity b) Why or Why not?

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Expert Solution

Solution :

a) We should not invest in the opportunity.

b) We should not invest in the opportunity because the Net Present value of the investment opportunity is = - $ 29.7829

= - $ 29.78 ( when rouded off to two decimal places )

Since the present values of the cash inflows is lesser than the Initial cash outflow, the net present value is negative. Hence the investment opportunity is not profitable and should not be taken up.

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

jeff jeffy answered 1 year ago
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