A friend of yours can invest in a multiyear project. The cost is $14,000. Annual cash flows are estimated to be $5,000 per year for six years but could vary between $2,500 and $7,000. Your friend estimates that the cost of capital (interest rate) is 11 %, but it could be as low as 9.5% and as high as 12 %. The basis of the decision to invest will be whether the project has a positive net present value. Construct a tornado diagram for this problem. Based on the tornado diagram, advise your friend regarding either (1) whether to invest or (2) what to do next in the analysis.
A friend of yours can invest in a multiyear project. The cost is $14,000. Annual cash flows are estimated to be $5,000 per year for six years but could vary between $2,500 and $7,000. Your friend estimates that the cost of capital (interest rate) is 11 %, but it could be as low as 9.5% and as high as 12 %. The basis of the decision to invest will be whether the project has a positive net present value. Construct a tornado diagram for this problem. Based on the tornado diagram, advise your friend regarding either (1) whether to invest or (2) what to do next in the analysis.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A friend of yours can invest in a multiyear project. The cost is
$14,000. Annual cash flows are estimated to be $5,000 per year
for six years but could vary between $2,500 and $7,000. Your
friend estimates that the cost of capital (interest rate) is 11 %,
but it could be as low as 9.5% and as high as 12 %. The basis of
the decision to invest will be whether the project has a positive
Based on the tornado diagram, advise your friend regarding
either (1) whether to invest or (2) what to do next in the analysis.
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