Question

You have just been offered a contract worth $1.15 million per year for 6 years.​ However, to take the​ contract, you will need to purchase some new equipment. Your discount rate for this project is 11.5 %. You are still negotiating the purchase price of the equipment. What is the most you can pay for the equipment and still have a positive NPV​? The most you can pay for the equipment and achieve the 11.5 % annual return is $___ million

Marian Plunket owns her own business and is considering an investment. If she undertakes the​ investment, it will pay $5760 at the end of each of the next 3 years. The opportunity requires an initial investment of $1440 plus an additional investment at the end of the second year of $ 7200. What is the NPV of this opportunity if the interest rate is 1.6 % per​ year? Should Marian take​ it? What is the NPV of this opportunity if the interest rate is 1.6 % per​ year? The NPV of this opportunity is ​$___

Answer 1

a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=1.15*[1-(1.115)^-6]/0.115

=1.15*[1-0.520416186]/0.115

=1.15*4.17029403

=$4.8 million(Approx)

b.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=5760/1.016+5760/1.016^2+5760/1.016^3

=16741.44

Present value of outflows=Cash outflows*Present value of discounting factor(rate%,time period)

=1440+7200/1.016^2

=$8415.01

NPV=Present value of inflows-Present value of outflows                  

=16741.44-8415.01

=$8326.43(Approx)

Hence since NPV is positive;opportunity must be taken