Question

Marian Plunket owns her own business and is considering an investment. If she undertakes the​ investment, it will pay $ 20,000 at the end of each of the next 3 years. The opportunity requires an initial investment of $ 5,000 plus an additional investment at the end of the second year of $ 25,000. What is the NPV of this opportunity if the interest rate is 2 % per​ year? Should Marian take​ it?

Answer 1

Present value of cash outflow =Initial investment + present value of investment made at end of year 2[PVF2%,2]

          = 5000+ [.96117*25000]

          = 5000 + 24029.25

          = 29029.25

PRESENT value of cash inflow = PVA 2%,3* Amount

                  = 2.88388* 20000

                     = 57677.6

NPV =present value of cash inflow -present value of cash outflow

            = 57677.6- 29029.25

              = 28648.35

since NPV is positive ,marian should take the investment.