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Finance Accounting
Trying to find out if I have the opportunity to make an investment of $900,000, If I make this investment now, I will receive $120,000, $250,000 and $800,000 one, two, and three years from today, respectively. The appropriate discount rate for this investment is 12 percent. Should I make this investment?
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Well, the decision is up to you.
Rather, your teacher since he/she was the one who assigned this homework question. Please refer to this thread: https://www.askmehelpdesk.com/financ...ard-25444.html Basically, show YOUR attempt at this problem. Then we will look at it. |
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4.10 You have the opportunity to make an investment of $900,000. If you make this investment
now, you will receive $120,000, $250,000 and $800,000 one, two, and three years from today, respectively.The appropriate discount rate for this investment is 12 percent. a. Should you make the investment? PV = CT/(1+r)^T Year Cash flow X PV factor = Present Value 0 - $ 900,000.00 x 1 = -900,000.00 1 $ 120,000.00 x (1/1.12) = .8928 = 107,136.00 PV each year 1 2 $ 250,000.00 x (1/1.12)^2 = .7971 = 199,275.00 PV each year 2 3 $ 800,000.00 x (1/1.12)^3 = .7116 = 569,280.00 PV each year 3 ---------------------------- Total = - 24, 309.00 The ivestment of 900,000.00 should not be invested because the present value of its future cash flows is less than its cost. The NPV is -24,309.00 b. What is the net present value (NPV) of this opportunity? Year Cash flow X PV factor = Present Value 0 - $ 900,000.00 x 1 = -900,000.00 1 $ 120,000.00 x (1/1.12) = .8928 = 107,136.00 2 $ 250,000.00 x (1/1.12)^2 = .7971 = 199,275.00 3 $ 800,000.00 x (1/1.12)^3 = .7116 = 569,280.00 ---------------------------- NPV Total = - 24, 309.00 c. If the discount rate is 11 percent, should you invest? Compute the NPV to support your answer. Year Cash flow X PV factor = Present Value 0 - $ 900,000.00 x 1 = -900,000.00 1 $ 120,000.00 x (1/1.11) = .9009 = 108,108.00 2 $ 250,000.00 x (1/1.11)^2 = .8264 = 206,600.00 3 $ 800,000.00 x (1/1.11)^3 = .7312 = 584,960.00 ---------------------------- NPV Total = - 332.00 The ivestment of 900,000.00 should not be invested because the present value of its future cash flows is less than its cost. The NPV is -332.00 |
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