a firm can invest 5 million today in order to receive two pa

a firm can invest $5 million today in order to receive two payments. the first payment, $700,000 occurs exactly 3 years from today; the second payment, $5 million, occurs exactly 6 years from today. Question: Should the firm make this investment? Yes or no, then evaluate using the NET PRESENT VALUE criterion and a discount rate of 6%. ( you must show your calculations)

Solution

R = 6%

Net present value = present value of the cash inflows – initial investment

Net present value = 700000/(1+6%)^3 + 5000000/(1+6%)^6 - 5000000

Net present value = -$887464 or -$.8875 Million

Since the net present value of the investment is negative, then firm should not make this investment.