You have been offered a unique investment opportunity. If you invest $ 15000 tod
ID: 2740437 • Letter: Y
Question
You have been offered a unique investment opportunity. If you invest $ 15000 today, you will receive $750 one year from now, $2,250 two years from now, and $15,000 ten years from now. a. What is the NPV of the investment opportunity if the interest rate is 6% per year? Should you take the opportunity? b. What is the NPV of the investment opportunity if the interest rate is 2% per year? Should you take the opportunity? How is discount rate factored? How is PV(C(t) calculated? Please show all work in excel format
Explanation / Answer
A.) NPV of Investment Opportunity
Year
Particulars
Cash Flow (in $)
Discounting Factor @ 6%
Discounted Cash Flow (in $)
0
Investment
(15,000)
1
(15,000)
1
Receipt
750
0.9434
707.55
2
Receipt
2,250
0.8899
2,002.275
10
Receipt
15,000
0.5584
8,376
Net Present Value
(3,914.175)
As the NPV of the opportunity is negative the opportunity should not be considered.
B.)
Year
Particulars
Cash Flow (in $)
Discounting Factor @ 2%
Discounted Cash Flow (in $)
0
Investment
(15,000)
1
(15,000)
1
Receipt
750
0.9804
735.3
2
Receipt
2,250
0.9612
2,162.7
10
Receipt
15,000
0.8203
12,304.5
Net Present Value
202.5
As the NPV of the opportunity is positive the opportunity should be considered at @% Interest rate.
Note: Here rounding off of Discounting factor is consider.
Discount rate is generally considered from opportunity cost or WACC
Excel Function: for Present Value calculation is =PV(rate, no. of years, number of months, FV, 0/1)
Notes:
PV=Present Value,
Rate = Rate of Interest per annum,
Number months should be “0” if the interest is paid annually,
FV = Future Value,
0 = to be used when amount received at end of the year and
1 = to be used is amount received at the beginning of the year
Year
Particulars
Cash Flow (in $)
Discounting Factor @ 6%
Discounted Cash Flow (in $)
0
Investment
(15,000)
1
(15,000)
1
Receipt
750
0.9434
707.55
2
Receipt
2,250
0.8899
2,002.275
10
Receipt
15,000
0.5584
8,376
Net Present Value
(3,914.175)
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