You have the opportunity to make an investment of $900,000. If you make this inv

Question

You have the opportunity to make an investment of $900,000. If you make this investment now, you will receive $120,000, $250,000, and $800,000 one, two, and three years from today, respectively. The appropriate discount rate for this investment is 12 percent. Should you make the investment? What is the net present value (NPV) of this opportunity? If the discount rate is 10 percent, should you invest? Compare the NPV to support your answer. Today a firm signed a contract to sell a capital asset for $90,000. The firm will receive the payment five years from today. The asset costs $60,000 to produce, payable immediately. If the appropriate discount rate is 10 percent, what is the NPV of the contract? At what discount rate will the firm break even on the sale of the asset? Suppose you deposit $1,000 in an account at the end of each of the next four years. If the account earns 12 percent annually, how much will be in the account at the end of seven years?

Explanation / Answer

(3.8)

(a) The investment decision will depend on NPV, which is the sum of all discounted cash inflows and outflows. If NPV is positive, the investment should be accepted, otherwise not.

This project yields a negative NPV (see below), so it should not be accepted.

(b)

NPV calculations as follows.

NPV = - $24,134

(c) If discount rate = 10%:

NPV = $16,754 > 0. So, when discounted at 10%, the project is acceptable.

NOTE: Out of 3 multi-part questions, the first question is solved in full.

Year Cash Flow ($) Discount factor @12% CF Discounted at 12% ($) 0 -9,00,000 1.0000 -9,00,000 1 1,20,000 0.8929 1,07,143 2 2,50,000 0.7972 1,99,298 3 8,00,000 0.7118 5,69,424 NPV = -24,134

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.