A company is considering an opportunity that requires an investment of $1,500,000 today and will provide...
A company is considering an opportunity that requires an investment of $1,500,000 today and will provide $350,000 one year from now, $450,000 two years from now, and $630,000 three years from now. If the appropriate interest rate is 15%, then the company should:
A) invest in this opportunity since the NPV is positive.
B) not invest in this opportunity since the NPV is positive.
C) invest in this opportunity since the NPV is negative.
D) not invest in this opportunity since the NPV is negative.
Homework Answers
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=350,000/1.15+450,000/1.15^2+630,000/1.15^3
=1058847.7
NPV=Present value of inflows-Present value of outflows
=1058847.7-1,500,000
=-441152.3(Approx)(Negative)
Hence since NPV is negative;project must not be invested in.
Hence the correct option is:
D) not invest in this opportunity since the NPV is negative.
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