An investment that requires $2,000 initial investment will return $800 at the en

Question

An investment that requires $2,000 initial investment will return $800 at the end of first year, $850 at the end of second year, and $900 at the end of third year. Assume the discount rate is continuously compounded at 10%, what is the Net Present Value of the investment? 1. The Net Present Value of the investment is between 87 to 88 2.The Net Present Value of the investment is 88 to 89 3. The Net Present Value of the investment is 85 to 86 04. The Net Present Value of the investment is 86 to 87 S. The Net Present Value of the investment is 84 to 85 s Moving to another question will save this response Question 2 of 3 888 a

Explanation / Answer

Initial Investment = $2,000
Return in Year 1 = $800
Return in Year 2 = $850
Return in Year 3 = $900

Interest rate = 10% compounding continuously

NPV = -$2,000 + $800 * exp(-0.10 * 1) + $850 * exp(-0.10 * 2) + $900 * exp(-0.10 * 3)
NPV = -$2,000 + $800 * 0.9048 + $850 * 0.8187 + $900 * 0.7408
NPV = $86.46

So, the net present value of the investment is 86 to 87

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