Question

Problem 8-6 You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1,500 two years from now, and $10,000 ten years from now. Complete the steps below using cell references to given data or previous calculations. In some cases, a simple cell reference is all you need. To copy/paste a formula across a row or down a column, an absolute cell reference or a mixed cell reference may be preferred. If a specific Excel function is to be used, the directions will specify the use of that function. Do not type in numerical data into a cell or function. Instead, make a reference to the cell in which the data is found. Make your computations only in the blue cells highlighted below. In all cases, unless otherwise directed, use the earliest appearance of the data in your formulas, usually the Given Data section. a. What is the NPV of the opportunity if the cost of capital is 6% per year? Should you take the opportunity? What is the NPV of the opportunity if the cost of capital is 2% per year? Should you take it now? Initial investment Cash flow year 1 Cash flow year 2 Cash flow year 10 $ $ $ $ 10,000 500 1,500 10,000 a. What is the NPV of the opportunity if the cost of capital is 6% per year? Should you take the opportunity? Cost of capital C6% NPV Take opportunity (Yes/No) What is the NPV of the opportunity if the cost of capital is 2% per year? Should you take it now? Cost of capital 2% NPV Take opportunity (Yes/No) Requirements In cell 017, by using cell references, write an expression to calculate the NPV of the investment opportunity (1 pt.). 2 In cell D18, type Yes or No depending on whether you would take the opportunity or not (1 pt.). ? In cell D24, by using cell references, write an expression to calculate the NPV of the investment opportunity (1 pt.). I l Voc Nodondin wether you would take the nortunitor not (int

Answer 1

The formula to calculate Net Present Value (NPV) is Present Value of expected cash inflows - Present Value of Cash Outflows.

To get the present value we use time value of money, which gives present money value of a future expected inflow.

Case 1: Where Cost of capital is 6% per year.

The equation can be termed in the following way,

NPV = Present value of cash inflows - Initial investment in today's value

NPV = (500/(1+0.06)¹ + 1,500/(1+0.06)² + 10,000/(1+0.06)¹⁰) - 10,000

Calculating this equation will give you the absolute return, which is -$2609.36

Case 2: When Cost of Capital is 2% per year.

Follow the same process, and the equation is,

NPV = (500/(1+0.02)¹ + 1,500/(1+0.02)² + 10,000/(1+0.02)¹⁰) - 10,000

Calcuate the equation.

The absolute return is $135.4322

So, the case 2 opportunity is to be selected as it gives the positive return, instead of case 1 which gives negative return.

Attached are the Images to calculate in Excel Sheet(Showing formula and without showing formula).
Baok1 - Excel (Product Activation Failed) kalyan Ak FORMULAS DATA REVIEW FILE HOME INSERT PAGE LAYOUT VIEW fx Show Formulas ?A = Define Name Trace Precedents Trace Dependents ECalculate Now Use in Formula Error Checking Watch CalculationCalculate Sheet Insert AutoSum Recently Financial Logical Text Date & Lookup & Math & More Name Time Reference Trig Functions Manager Create from Selection Remove Arrows h Evaluate Fom ula Window Options Function Used Farmula Auditing Function Library Delined Narnes Calculation A C11 A C D E G н To calculate NPV Using Excel To calculate NPV Using Excel 0.06 Cost of Capital 0.02 2 Cost of Capital 3 NPV 4 Take Opportunity (Yes/No) IF(B3>0,"YES","NO") |NPV(SB$2,$B7:$B16)-$B$5 =NPV(E$2,E7:E16)-ES5 IFIE3>=0,"YES","NO" 10000 Cash Inflows 500 NPV Take Opportunity (Yes/No) Initial Investment Year 10000 Cash Inflows 5 Initial Investment 6 Year 500 1500 0 1 2 7 1 1500 8 2 9 3 0 4 0 10 4 11 5 0 0 0 6 0 12 6 7 0 13 7 8 0 14 8 0 0 15 9 10000 10000 16 10 10 17 18 19 20 21 22 23 24 25 Sheet1 + 10% READY

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