Question

8-7 (similar to) Question Help Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $5,800 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,450 plus an additional investment at the end of the second year of $7.250. What is the NPV of this opportunity if the nterest rate is 1.6% per year? Should Marian take it?

Answer 1

Solution:

It is given initial outlay is $1,450 and $7,250 in year 2.

Cashflows are $5,800 in year 1 , 2 and 3

Net cash flow are

Year 0 = -1,450

Year 1 = 5,800

Year 2 = 5,800 - 7,250 = -1,450

Year 3 = 5,800

Interest rate is 1.6% , let's discount the cashflow with this interest rate to get the NPV

NPV = CF0 + CF1/ ( 1+1.6%)^1 + CF2/ (1+ 1.6%)^2 + CF3 / (1+1.6%)^3

NPV = -1,450 + 5800/1.016 + -1,450/ 1.016^2 + 5800/1.016^3

NPV = -1,450 + 5708.66 -1404.69 + 5530.27 = 8,384.25

NPV = $8,384.25

Yes Marian should take the project as NPV is positive