ear-end payments of $2,50 $8,500 investment to receive equal year-end payments o

Question

ear-end payments of $2,50 $8,500 investment to receive equal year-end payments of $2,000. However, Duan requires a 9.5% return on the first investment and an 8% return on the second in- vestment opportunity a. Calculate the net present value (NPV) of the first investment opportunity. b. Calculate the net present value (NPV) of the second investment opportunity. c. Which investment opportunity is the better choice? Why? d. Which investment opportunity is the riskier choice? Why? 0. The second investment opportunity requires an

Explanation / Answer

NPV = Annual Cash Inflows x Cumulative Present Value Factor (Rate, Years) - Initial Investment

a) First Invesment Opportunity = $2500 x CPVF(9.5%, 8) - $10000 = $2500 x 5.43343581296 - $10000 = $3,583.59

b) Second Invesment Opportunity = $2000 x CPVF(8%, 8) - $10000 = $2000 x 5.74663894353 - $8500 = $2,993.28

c) First investment opportunity is better choice as it has higher NPV.

d) First investment opportunity is riskier as it requires higher intial outflow and also has higher return expectations which it may or may not achieve.

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