Your broker calls you and tells you that he has this great investment opportunity. If you...
Your broker calls you and tells you that he has this great investment opportunity. If you invest $100 today, you will receive $40 in one year and $75 in two years. If you require a 15% return on investments of this risk, should you take the investment?
Homework Answers
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=40/1.15+75/1.15^2
=$91.49
NPV=Present value of inflows-Present value of outflows
=$91.49-$100
=($8.51)(Approx)(Negative).
Hence since NPV is negative;investment must not be taken.
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