Please help! Will rate highest possible The ABC Company has $20 Million ($20,000
ID: 2647885 • Letter: P
Question
Please help! Will rate highest possible
The ABC Company has $20 Million ($20,000,000) it wants to invest, and is trying to decide what to do. They have an investment that will pay them 7.5% annual interest into which they can put the entire $20 Million today. They also are considering putting $15 million into a 4 year joint venture, which is expected to yield them at the end of each year:
Year 1 - $3 Million
Year 2 - $4 Million
Year 3 - $5 Million
Year 4 - $6 Million
If they choose the joint venture, they can invest the remaining $5,000,000 into the 7.5% investment (today), and then invest the annual returns at the end of each year as they receive them.
Use the Net Present Value (NPV) function to determine which strategy the ABC Company should choose.
Explanation / Answer
If considering putting $15 million into a 4 year joint venture
NPV = - 15 + 3/1.075 + 4/1.075^2 + 5/1.075^3+ 6/1.075^4
NPV = - 0.23037 Million
Decision : ABC Company Should put the entire $20 Million today @ 7.5%