You have been offered a unique investment opportunity. If you invest $9,800 toda
ID: 2794008 • Letter: Y
Question
You have been offered a unique investment opportunity. If you invest $9,800 today, you will receive $490 one year from now, $1,470 two years from now, and $9,800 ten years from now. a. What is the NPV of the opportunity if the cost of capital is 6.2% per year? Should you take the opportunity? b. What is the NPV of the opportunity if the cost of capital is 2.2% per year? Should you take it now? a. What is the NPV of the opportunity if the cost of capital is 6.2% per year? If the cost of capital is 62% per year, the NPV is (Round to the nearest cent.)Explanation / Answer
a. NPV = Present Value of Cash Inflows - Present Value of Cash Outflows
= $ 490*1/( 1.062)^1 + $ 1,470 *1/( 1.062)^2 + $ 9,800 *1/( 1.062)^ 10 - $ 9,800
= $ 7,134.85 - $ 9,800
= - $ 2,665.15
Hence the correct answer is - $ 2,665.15
Since the NPV is negative, this opportunity must not be taken.
Hence the correct answer is No.
b.
NPV = Present Value of Cash Inflows - Present Value of Cash Outflows
= $ 490*1/( 1.022)^1 + $ 1,470 *1/( 1.022)^2 + $ 9,800 *1/( 1.022)^ 10 - $ 9,800
= 9,770.31 - $ 9,800
= - $ 29.69
Hence the NPV is - $ 29.69
Since the NPV is negative it should not be taken now.
Hence the correct answer is No.
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