Question

You have been offered a unique investment opportunity. If you invest $11,800 today, you will receive $590 one year from now, $1,770 two years from now, and $11,800 in ten years. a. What is the NPV of the opportunity if the cost of capital is 6.4% per year? Should you take the opportunity? b. What is the NPV of the opportunity if the cost of capital is 2.4% per year? Should you take it now? a. What is the NPV of the opportunity if the cost of capital is 6.4% per year? If the cost of capital is 6.4% per year, the NPV is $ . (Round to the nearest cent.) Should you take the opportunity? (Select from the drop-down menu.) You take this opportunity. b. What is the NPV of the opportunity if the cost of capital is 2.4% per year? If the cost of capital is 2.4% per year, the NPV is $ . (Round to the nearest cent.) Should you take it now? (Select from the drop-down menu.) You take this opportunity at the new cost of capital.

Answer 1

a). NPV = PV of Cash Inflows - PV of Cash Outflows

= [$590 / (1 + 0.064)] + [$1,770 / (1 + 0.064)²] + [$11,800 / (1 + 0.064)¹⁰] - $11,800

= $554.51 + $1,563.47 + $6,345.50 - $11,800 = -$3,336.52

You should not take this opportunity as its NPV is negative.

b). NPV = PV of Cash Inflows - PV of Cash Outflows

= [$590 / (1 + 0.024)] + [$1,770 / (1 + 0.024)²] + [$11,800 / (1 + 0.024)¹⁰] - $11,800

= $576.17 + $1,688.00 + $9,308.56 - $11,800 = -$227.27

You should not take this opportunity as its NPV is negative.