Question

Marian Plunket owns her own business and is considering an investment. If she undertakes the​ investment, it will pay $5,680 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,420 plus an additional investment at the end of the second year of $7,100.

What is the NPV of this opportunity if the interest rate is 2.1% per​ year? Should Marian take​ it?

What is the NPV of this opportunity if the interest rate is 2.1% per​ year?

Answer 1

Initial investment = $1,420

First year cash inflow = $5,680

Second year cash inflow = $5,680 - $7,100 = - $1,420

Third year casg inflow = $5,680

NPV = PV of casg inflows - initial investment

= 5680/(1+2.1%)^1 + -1420/(1+2.1%)^2 + 5680/(1+2.1%)^3 - 1420

= 5680/1.021 - 1420/(1.021)^2 + 5680/(1.021)^3 - 1420

= 5680/1.021 - 1420/1.042441 + 5680/1.064332261 -1420

= 5563.17 - 1362.19 + 5336.67 - 1420

= 8117.65

Since NPV is a postive number, Marian should take it.