Question

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 6.5% per​ year? Should you take the​ opportunity?b. What is the NPV of the opportunity if the cost of capital is 2.5% per​ year? Should you take it​ now?

a. What is the NPV of the opportunity if the cost of capital is 6.5% per​ year?

If the cost of capital is 6.5% per​ year, the NPV is: $ (Round to the nearest​ cent.)

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

You

▼

should not

should

take this opportunity.  

b. What is the NPV of the opportunity if the cost of capital is 2.5% per​ year? If the cost of capital is 2.5% per​ year, the NPV is: $ ​(Round to the nearest​ cent.)

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

You

▼

should not

should

take this opportunity at the new cost of capital.

Answer 1

a

Opportunity
Discount rate	0.065
Year	0	1	2	3
Cash flow stream	-11700	585	1755	11700
Discounting factor	1	1.065	1.134225	1.20795
Discounted cash flows project	-11700	549.2958	1547.312	9685.834
NPV = Sum of discounted cash flows
NPV Opportunity =	82.44
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Accept project as NPV is positive

b

Opportunity
Discount rate	0.025
Year	0	1	2	3
Cash flow stream	-11700	585	1755	11700
Discounting factor	1	1.025	1.050625	1.076891
Discounted cash flows project	-11700	570.7317	1670.434	10864.61
NPV = Sum of discounted cash flows
NPV Opportunity =	1405.78
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Accept project as NPV is positive