Question

Marian Plunket owns her own business and is considering an investment. If she undertakes the​ investment, it will pay $5360 at the end of each of the next 3 years. The opportunity requires an initial investment of $1340 plus an additional investment at the end of the second year of $6700 . What is the NPV of this opportunity if the interest rate is 2.1% per​ year? Should Marian take​ it? What is the NPV of this opportunity if the interest rate is 2.1% per​ year? The NPV of this opportunity is ​$

Answer 1

- Initial Investment at (time = 0 years) = $1340

Other than the Initial investment, the Opportunity will require an additional Investment of $6700 at the end of the second year.

The Investment will provide Cashflow of $5360 at the end of each of the next 3 years

Net cashflow in year 2 = Cash Inflow - Cash outflow = $5360 - $6700

= -$1340

Now, Calculating the NPV of the Opportunity if the interest rate is 2.1% per​ year:-

Year	Cash Flow of Project ($)	PV Factor @2.1%	Present Value of Project ($)
0	(1,340.00)	1.00000	(1,340.00)
1	5,360.00	0.97943	5,249.76
2	(1,340.00)	0.95929	(1,285.44)
3	5360.00	0.93956	5,036.02
			7,660.33

So, NPV of this opportunity is ​$7660.33

- As the NPV is positive, Marian Plunket should take the Opportunity