P4-14 (similar to) Question Help You have been offered a unique investment oppor

ID: 2780664 • Letter: P

Question

P4-14 (similar to)

Question Help

You have been offered a unique investment opportunity. If you invest

$ 25 comma 000$25,000

today, you will receive

$ 1 comma 250$1,250

one year from now,

$ 3 comma 750$3,750

two years from now, and

$ 25 comma 000$25,000

ten years from now.a. What is the NPV of the investment opportunity if the interest rate is

6 %6%

per year? Should you take the opportunity?b. What is the NPV of the investment opportunity if the interest rate is

2 %2%

per year? Should you take the opportunity?a. What is the NPV of the investment opportunity if the interest rate is

6 %6%

per year?The NPV of the investment opportunity if the interest rate is

6 %6%

per year is

$nothing.

(Round to the nearest dollar.)

P4-14 (similar to)

Question Help

Answer a.

Amount Invested = $25,000
Amount received in one year is $1,250, $3,750 in two years and $25,000 in ten years from now.

Interest rate = 6%

NPV = -$25,000 + $1,250/1.06 + $3,750/1.06^2 + $25,000/1.06^10
NPV = -$6,523

So, Opportunity should be rejected as NPV is negative.

Answer b.

Amount Invested = $25,000
Amount received in one year is $1,250, $3,750 in two years and $25,000 in ten years from now.

Interest rate = 2%

NPV = -$25,000 + $1,250/1.02 + $3,750/1.02^2 + $25,000/1.02^10
NPV = $339

So, Opportunity should be accepted as NPV is positive.

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