Question

You have been offered a unique investment opportunity. If you invest $20,000 today, you will receive $1,000 one year from now, $3,000 two years from now, and $20,000 ten years from now.

(a) The NPV of the opportunity if the interest rate is 10% per year is $Answer

. (Round to the nearest dollar.)

Should you take the opportunity

Reject it because the NPV is less than 0.

Take it because the NPV is equal or greater than 0.

(b) The NPV of the opportunity if the interest rate is 6% per year is $Answer

. (Round to the nearest dollar.)

Should you take the opportunity

Reject it because the NPV is less than 0.

Take it because the NPV is equal or greater than 0.

Answer 1

*any doubt please comment

a. NPV = -20000 + 1000 / 1.1 + 3000/ (1.1)² + 20000/ (1.1)¹⁰

= -8901

Reject it because the NPV is less than 0.

b. NPV = -20000 + 1000 / 1.06 + 3000/ (1.06)² + 20000/ (1.06)¹⁰

= -5219

Reject it because the NPV is less than 0.