Your brother wants to borrow $10,500 from you. He has offered to pay you back $1

Question

Your brother wants to borrow $10,500 from you. He has offered to pay you back $13,000 in a year. If the cost of capital of this investment opportunity is 11%, what is its NPV? Should you undertake the investmentopportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

This Question: 4 pts 7 of 15 This Quiz: 60 pts poss Your brother wants to borrow $10,500 from you. He has offered to pay you back $13,000 in a year. If the cost of capital of this investment opportunity is 11%, what is its NPV? Should you undertake the investment pportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged If the cost of capital of this investment opportunity is 1 1%, what is its NPV? The NPV of the investment is SD (Round to the nearest cent) Should you undertake the investment opportunity? Since the NPV is Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. The IRR is LMa (Round to two decimal places.) The maximum deviation allowable in the cost of capital is % Round to two decimal places. you should the deal! (Select from the drop-down menus.)

Explanation / Answer

Amount borrowed = $10,500
Amount repaid after 1 year = $13,000
Cost of Capital = 11%

Answer a.

NPV = -$10,500 + $13,000/1.11
NPV = $1,211.71

Since the NPV is positive, you should accept the deal.

Answer b.

Let IRR be i%

NPV = -$10,500 + $13,000/(1+i)
0 = -$10,500 + $13,000/(1+i)
1 + i = 1.2381
i = 0.2381 or 23.81%

The IRR is 23.81%

The maximum deviation allowable in the cost of capital is 12.81% (23.81% - 11%)

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