You have been given the opportunity to invest $1,000 on January 1, 2010. Althoug

Question

You have been given the opportunity to invest $1,000 on January 1, 2010. Although uncertainty surrounds any future event, your advisor feels fairly certain the investment will return at least $200 at the end of this year and each of the seven years thereafter (8 years total), after which the investment will have no further value. Should you invest and what is the net present value of the investment? Your opportunity rate is 12%/year. ...I can't figure out the correct calculator entries for this type of problem. Thanks!

Explanation / Answer

Present Value Annuity Factor = [1 - (1 + 0.12)-7]/0.12 = 4.5638

We have to add 1.000 to 4.5638 as the cash flows begins at end of year 0 = 4.5638 + 1 = 5.5638

Net present value = -1000 + 200 x 5.5638 = $112.76

Since NPV is positive, the ivnestment should be proceeded.

Hope this helps!

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