Problem 4-11
Interest rate
6.00%
NPV
(2,609.36)
Year
0
1
2
3
4
5
6
7
8
9
10
Cash flow:
($10,000.00)
$500.00
$1,500.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$10,000.00
Discounted value
(10,000.00)
471.70
1,334.99
0.00
0.00
0.00
0.00
0.00
0.00
0.00
5,583.95
NPV
(2,609.36)
At an interest rate of
6.00%
the NPV is
(2,609.36)
so reject the project.
At an interest rate of
2.00%
the NPV is
135.43
so accept the project.
The relationship is illustrated by the chart below:
Data for NPV profile:
0%
2,000.00
1%
1,018.36
2%
135.43
3%
-659.73
4%
-1,376.75
5%
-2,024.13
6%
-2,609.36
7%
-3,139.06
You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and
$10,000 ten years from now.
a.
What is the NPV of the opportunity if the interest rate is 6% per year? Should you take the opportunity?
b.
What is the NPV of the opportunity if the interest rate is 2% per year? Should you take it now?
0%
1%
2%
3%
4%
5%
6%
7%
-4,000.00
-3,000.00
-2,000.00
-1,000.00
0.00
1,000.00
2,000.00
3,000.00
NPV
Column M
Discount rate
NPV