Use the following information to answer the question(s) below. Nielson Motors is
ID: 2730996 • Letter: U
Question
Use the following information to answer the question(s) below. Nielson Motors is considering an opportunity that requires an investment of SI.000.000 today and will provide $250,000 year from now. $450,000 two years from now. and $650,000 three years from now. If the appropriate interest rate is 10%. then Nielson Motors should: Do Not Invest in this opportunity since the NPV is positive. Invest in this opportunity since the NPV is negative. Do Not Invest in this opportunity since the NPV is negative. Invest in this opportunity since the NPV is positive.Explanation / Answer
Calculation of Net Present value (NPV) for the project:
Now
Year 1
Year 2
Year 3
Investment today
$ (1,000,000)
Cash inflows
$ 250,000
$ 450,000
$ 650,000
Net Cash Flows (CF)
$ (1,000,000)
$ 250,000
$ 450,000
$ 650,000
Present value of $ 1 (At 10% Discount Rate) (PVF)
1.00000
0.90909
0.82645
0.75131
= 1/(1+r)^n =
1/(1+10%)^0
1/(1+10%)^1
1/(1+10%)^2
1/(1+10%)^3
PV = CF*PVF
$ (1,000,000.00)
$ 227,272.73
$ 371,900.83
$ 488,354.62
NPV = Sum of PVs
$ 87,528.17
The NPV of the project is Positive, hence Nielson Motors should invest in this opportunity.
Hence the correct option is :
Invest in this opportunity since the NPV is positive.
Calculation of Net Present value (NPV) for the project:
Now
Year 1
Year 2
Year 3
Investment today
$ (1,000,000)
Cash inflows
$ 250,000
$ 450,000
$ 650,000
Net Cash Flows (CF)
$ (1,000,000)
$ 250,000
$ 450,000
$ 650,000
Present value of $ 1 (At 10% Discount Rate) (PVF)
1.00000
0.90909
0.82645
0.75131
= 1/(1+r)^n =
1/(1+10%)^0
1/(1+10%)^1
1/(1+10%)^2
1/(1+10%)^3
PV = CF*PVF
$ (1,000,000.00)
$ 227,272.73
$ 371,900.83
$ 488,354.62
NPV = Sum of PVs
$ 87,528.17
The NPV of the project is Positive, hence Nielson Motors should invest in this opportunity.
Hence the correct option is :
Invest in this opportunity since the NPV is positive.
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