Explain completely which investment 1 or 2 you would invest in today given the f
ID: 1090700 • Letter: E
Question
Explain completely which investment 1 or 2 you would invest in today given the fallowing information:
Investment 1
Investment 2
Year
Revenues
Costs
Year
Revenues
Costs
Discount rate 5%
Discount rate 6%
0
0
0
0
10,000
1
1,000
2,000
1
1,000
0
2
2,000
2,000
2
3,000
0
3
3,000
2,000
3
4,000
0
4
4,000
2,000
4
5,000
0
5
5,000
2,000
5
5,000
0
Assume the firm wants to maximize profits where: Profits = Revenue
Investment 1
Investment 2
Year
Revenues
Costs
Year
Revenues
Costs
Discount rate 5%
Discount rate 6%
0
0
0
0
10,000
1
1,000
2,000
1
1,000
0
2
2,000
2,000
2
3,000
0
3
3,000
2,000
3
4,000
0
4
4,000
2,000
4
5,000
0
5
5,000
2,000
5
5,000
0
Assume the firm wants to maximize profits where: Profits = Revenue
Explanation / Answer
Investment 1 Investment 2 Year Revenue Costs NPV @ Discount rate 5% NPV @ Discount rate 6% 1 1000 2000 -952.38 -943.40 2 2000 2000 0.00 0.00 3 3000 2000 863.84 839.62 4 4000 2000 1645.40 1584.19 5 5000 2000 2350.58 2241.77 Total NPV 3907.44 3722.18 As per the Above calculation Investment 1 is the best option Because it gives more profit than 2 Here Formula to calculate NPV of the Profit (Revenue-cost)/(1+r)^n Here r=discount rate n=no of Years
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