Two investment opportunities are open to you: Investment 1 and Investment 2. Eac

Question

Two investment opportunities are open to you: Investment 1 and Investment 2. Each has an initial cost of $10,000. Assuming that you desire a 10 percent return on your initial investment, compute the net present value of the two alternatives and evaluate their relative attractiveness:

Investment 1                                                               Investment 2

Cash Flows       Year                                                    Cash Flows                   Year

$5,000              1                                                          $8,000 1         

6,000                2                                                          7,000 2

7,000               3                                                          6,000 3

8,000               4                                                          5,000 4

Explanation / Answer

Answer: Investment 1

Investment2:

Particulars Time P.V.F (10%) Amount ($) P.V ($) Cash outflow (A) 0 1 10000 10000 Cash inflow 1 0.909 5000 4545 2 0.826 6000 4956 3 0.751 7000 5257 4 0.683 8000 5464 Total cash inflow (B) 20222 NPV (B-A) 10222

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