You have been offered a unique investment opportunity If you

You have been offered a unique investment opportunity. If you invest $9,900 today, you will receive $495 one year from now, $1,485 two years from now, and $9,900 ten years from now. a. What is the NPV of the opportunity if the cost of capital is 5.8% per year? Should you take the opportunity? b. What is the NPV of the opportunity if the cost of capital is 1.8% per year? Should you take it now? a. What is the NPV of the opportunity if the cost of capital is 5.8% per year? If the cost of capital is 5.8% per year, the NPV is $ (Round to the nearest cent Should you take the opportunity? (Select from the drop-down menu.) You b. What is the NPV of the opportunity if the cost of capital is 1.8% per year? If the cost of capital is 1.8% per year, the NPV is $ (Round to the nearest cent) Should you take it now? (Select from the drop-down menu.) You .) take this opportunity. Vtake this opportunity at the new cost of capital.

Solution

Present value of cash flow can be computed as -

PV = Cash flow / (1 + r)ⁿ

where, r is the cost of capital, n is the year to which the cash flow belongs

a) Cost of Capital is 5.8%

NPV = (-)$9900 + [ $495 / (1 + 5.8%)¹ ] + [ $1485 / (1 + 5.8%)² ] + [ $9900 / (1 + 5.8%)¹⁰ ] = (-)$2,471.99

No, we do not take this opportunity as NPV is negative.

b) Cost of Capital is 1.8%

NPV = (-)$9900 + [ $495 / (1 + 1.8%)¹ ] + [ $1485 / (1 + 1.8%)² ] + [ $9900 / (1 + 1.8%)¹⁰ ] = $301.62

Yes, you should take this opportunity at the new cost of capital.