Question

You have been offered a unique investment opportunity. If you invest $15,000 ?today, you will receive $750 one year from? now, 2,250 two years from? now, and $ 15 comma $15,000 ten years from now. a. What is the NPV of the investment opportunity if the interest rate is 8% per? year? Should you take the? opportunity? b. What is the NPV of the investment opportunity if the interest rate is 4% per? year? Should you take the? opportunity?

Answer 1

Please see the table below. Please be guided by the second row to understand the mathematics. The last row has two cells highlighted in yellow and blue. They are your answers. Figures in parenthesis, if any, mean negative values. All financials are in $.

Time	Cash flows	PV factor @ 8%	PV of cash flows	PV factor @ 4%	PV of cash flows
t	CF	PVF = 1.08^(-t)	PVF x CF	PVF = 1.04^(-t)	PVF x CF
0	(15,000)	1.0000	(15,000.00)	1.0000	(15,000.00)
1	750	0.9259	694.44	0.9615	721.15
2	2,250	0.8573	1,929.01	0.9246	2,080.25
10	15,000	0.4632	6,947.90	0.6756	10,133.46
NPV			(5,428.64)		(2,065.13)

Part (a)

NPV = - $ 5,428.64 (Please see the yellow highlighted cell)

Since, the NPV is negative, I will not undertake this opportunity

Part (b)

NPV = - $ 2,065.13 (Please see the blue highlighted cell)

Since, the NPV is still negative, I will not undertake this opportunity