Question

You are considering investing in a start up company. The founder asked you for $280,000 today and you expect to get $1,080,000 in 14 years. Given the riskiness of the investment​ opportunity, your cost of capital is 27% What is the NPV of the investment​ opportunity? Should you undertake the investment​ opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

You are considering investing in a start up company. The founder asked you for $280,000 today and you expect to get $1,080,000 in 14 years. Given the riskiness of the investment opportunity, your cost of capital is 27%. What is the NPV of the investment opportunity? Should you undertake the investment opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. What is the NPV of the investment opportunity? The NPV of the investment is $ (Round to the nearest dollar)

Answer 1

1.
=-Present Value+Future Value/(1+cost of capital)^t
=-280000+1080000/1.27^14
=-241966.0298

2.
Dont undertake

3.
IRR=(Future Value/Present Value)^(1/t)-1=(1080000/280000)^(1/14)-1
=10.12%

4.
Deviation allowed=IRR-cost of capital=10.12%-27%=-16.88%