### Investment Analysis for Marian Plunket's Business**Scenario:**Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $5,280 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,320 plus an additional investment at the end of the second year of $6,600.**Question:**What is the NPV of this opportunity if the interest rate is 2.1% per year? Should Marian take it?---**Analysis:****Calculating the Net Present Value (NPV):**To determine whether Marian should undertake the investment, let's calculate the NPV using the given interest rate of 2.1% per year.**Formula for NPV:**NPV = ∑ (Cash inflow / (1 + r)^t) - Initial InvestmentWhere:- r = interest rate- t = time period1. Initial Investment: $1,3202. Annual Cash Inflows: $5,280 at the end of each of the next 3 years3. Additional Investment at end of Year 2: $6,6004. Interest Rate: 2.1% per year**Steps to Calculate NPV:**1. Calculate the present value of each cash inflow.2. Subtract the present value of the initial and additional investments from the sum of the present values of the cash inflows.---The NPV of this opportunity is $ [ ]. (Round to the nearest cent.)---**Recommendation:**Marian should compare the NPV to zero. If the NPV is positive, it indicates that the investment will yield a net gain, making it a desirable investment. If the NPV is negative, the investment will result in a net loss, and she should not undertake it.---**Note:**This example highlights the importance of understanding and calculating the NPV when evaluating investment opportunities. The NPV helps in making informed decisions based on the potential profitability of the investment.

NPV means Net present value. It is calculated by deducting present value of cash outflows from…

Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $5,280 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,320 plus an additional investment at the end of the second year of $6,600. What is the NPV of this opportunity if the interest rate is 2.1% per year? Should Marian take it? What is the NPV of this opportunity if the interest rate is 2.1% per year? The NPV of this opportunity is $ (Round to the nearest cent.)

Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $5,280 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,320 plus an additional investment at the end of the second year of $6,600. What is the NPV of this opportunity if the interest rate is 2.1% per year? Should Marian take it? What is the NPV of this opportunity if the interest rate is 2.1% per year? The NPV of this opportunity is $ (Round to the nearest cent.)

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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Question

### Investment Analysis for Marian Plunket's Business

**Scenario:**
Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $5,280 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,320 plus an additional investment at the end of the second year of $6,600.

**Question:**
What is the NPV of this opportunity if the interest rate is 2.1% per year? Should Marian take it?

---

**Analysis:**

**Calculating the Net Present Value (NPV):**
To determine whether Marian should undertake the investment, let's calculate the NPV using the given interest rate of 2.1% per year.

**Formula for NPV:**
NPV = ∑ (Cash inflow / (1 + r)^t) - Initial Investment

Where:
- r = interest rate
- t = time period

1. Initial Investment: $1,320
2. Annual Cash Inflows: $5,280 at the end of each of the next 3 years
3. Additional Investment at end of Year 2: $6,600
4. Interest Rate: 2.1% per year

**Steps to Calculate NPV:**
1. Calculate the present value of each cash inflow.
2. Subtract the present value of the initial and additional investments from the sum of the present values of the cash inflows.

---

The NPV of this opportunity is $ [ ]. (Round to the nearest cent.)

---

**Recommendation:**
Marian should compare the NPV to zero. If the NPV is positive, it indicates that the investment will yield a net gain, making it a desirable investment. If the NPV is negative, the investment will result in a net loss, and she should not undertake it.

---

**Note:**
This example highlights the importance of understanding and calculating the NPV when evaluating investment opportunities. The NPV helps in making informed decisions based on the potential profitability of the investment.

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