Assume that you are presented with an investment opportunity that would cost $3,
ID: 2425091 • Letter: A
Question
Assume that you are presented with an investment opportunity that would cost $3,800 in today's money. Further assume that you can reasonably expect to generate $1,000 in income per year for each five years and that the prevailing cost of money or interest is 8%. The discount factors are (year 1: .926; year 2: .857; year 3: .794; year 4: .735; and year 5: .681). What would be the net present value(NPV), and should you except the opportunity? Can you show step by step calculation? Assume that you are presented with an investment opportunity that would cost $3,800 in today's money. Further assume that you can reasonably expect to generate $1,000 in income per year for each five years and that the prevailing cost of money or interest is 8%. The discount factors are (year 1: .926; year 2: .857; year 3: .794; year 4: .735; and year 5: .681). What would be the net present value(NPV), and should you except the opportunity? Can you show step by step calculation? Can you show step by step calculation?Explanation / Answer
The NPV is $ 193, and the opportunity should be taken up as the NPV is positive, which indicates that the return from this investment opportunity is higher than its Internal Rate of Return.
Now Year 1 Year 2 Year 3 Year 4 Year 5 Initial investment (3,800) Annual cash inflows 1,000 1,000 1,000 1,000 1,000 Discount factor at 8% 1 0.926 0.857 0.794 0.735 0.681 Present values (3,800) 926 857 794 735 681 NPV 193