Question

Your brother wants to borrow $9,500 from you. He has offered to pay you back $12,750 in a year. If the cost of capital of this investment opportunity is 10%​, what is its​ NPV? 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. If the cost of capital of this investment opportunity is 10%​, what is its​ NPV?

The NPV of the investment is​$nothing.​ (Round to the nearest​ cent.)

Should you undertake the investment​ opportunity?

Since the NPV is

▼

positive

negative

​, you should

▼

take

not take

the​ deal! ​ (Select from the​ drop-down menus.)

Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

The IRR is

nothing​%.

​ (Round to two decimal​ places.)The maximum deviation allowable in the cost of capital is

nothing​%.

​ (Round to two decimal​ places.)

Answer 1

NPV = Present value of cash inflows – present value of cash outflows

= 12,750/1.1 – 9500

= $2,090.91

Since NPV is positive

Take the deal

IRR is the rate at which NPV is zero or the actual rate earned

= (12,750-9500)/9500

= 34.21%

The maximum deviation allowable in the cost of capital is 34.21%-10%

= 24.21%