Question

Homework: Chapter 8 Homework Save 3 of 14 (6 complete) HW Score: 42.86%, 6 of 14 pts Score: 0 of 1 pt P 8-7 (similar to) Question Help Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $4,320 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,080 plus an additional investment at the end of the second year of $5,400. What is the NPV of this opportunity if the interest rate is 2.4% per year? Should Marian take it? What is the NPV of this opportunity if the interest rate is 2.4% per year? The NPV of this opportunity is $. (Round to the nearest cent.)

Answer 1

NPV = PV of cash inflows – PV of investment

Year	Cash Flow (C)	PV Factor Computation	PV Factor (F)	PV (= C x F)
0	-$ 1,080	1/ (1+1.024)0	1	-$1,080
1	$ 4,320	1/ (1+1.024)1	0.9765625	$4,218.7500000
2	-$1,080	1/ (1+1.024)2	0.95367431640625	-$1,029.9682617
3	$ 4,320	1/ (1+1.024)3	0.931322574615478	$ 4,023.3135223
			NPV	$6,132.0952606

NPV of the opportunity is $ 6,132.10

As NPV is positive, Marian Plunket should take the opportunity.