Question

Marian Plunket owns her own business and is considering an investment. If she undertakes the​ investment, it will pay $5,560 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,390 plus an additional investment at the end of the second year of $6,950. 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?

The NPV of this opportunity is what ? Round to the nearest cent.

Answer 1

Answer:

Initial Investment = $1,390

Investment after 2 years = $6,950

Cash inflow = $5,560 at the end of each of the next 3 years

Rate of interest = 2.1%

To calulate the present value of $1 @2.1% for 1 year = 1 / (1 + 2.1%) = 1 / (1 + 0.021) = 1 / 1.021 = 0.97943

Similarly present value of $1 @2.1% for 2 year = 1 / (1 + 2.1%)^2 = 1 / (1 + 0.021)^2 = 1 / 1.021^2 = 0.95929

Present value of $1 @2.1% for 3 year = 1 / (1 + 2.1%)^3 = 1 / (1 + 0.021)^3 = 1 / 1.021^3 = 0.93956

Calculation of NPV if the interest rate is 2.1%

So, the NPV is $7,946.17