Question

You have been offered a unique investment opportunity. If you invest $ 8 900 ​today, you will receive $ 445 one year from​ now, $ 1 335 two years from​ now, and $ 8 900 ten years from now. a. What is the NPV of the opportunity if the cost of capital is 6.3 % per​ year? Should you take the​ opportunity? b. What is the NPV of the opportunity if the cost of capital is 2.3 % per​ year? Should you take it​ now?

a. If the cost of capital is 6.3 % per​ year, the NPV is ​$ nothing. ​(Round to the nearest​ cent.) You should/not should take this opportunity. ​(Select from the​ drop-down menu.)

b. If the cost of capital is 2.3 % per​ year, the NPV is ​$ nothing. ​(Round to the nearest​ cent.) You should/should not take this opportunity at the new cost of capital. ​(Select from the​ drop-down menu.)

Answer 1

a

Project
Discount rate	6.300%
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-8900	445	1335	0	0	0	0	0	0	0	8900
Discounting factor	1.000	1.063	1.130	1.201	1.277	1.357	1.443	1.534	1.630	1.733	1.842
Discounted cash flows project	-8900.000	418.627	1181.448	0.000	0.000	0.000	0.000	0.000	0.000	0.000	4831.226
NPV = Sum of discounted cash flows
NPV Project =	-2468.70
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Reject project as NPV is negative

b

Project
Discount rate	2.300%
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-8900	445	1335	0	0	0	0	0	0	0	8900
Discounting factor	1.000	1.023	1.047	1.071	1.095	1.120	1.146	1.173	1.200	1.227	1.255
Discounted cash flows project	-8900.000	434.995	1275.645	0.000	0.000	0.000	0.000	0.000	0.000	0.000	7089.795
NPV = Sum of discounted cash flows
NPV Project =	-99.56
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Reject project as NPV is negative