Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $4,680 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,170 plus an additional investment at the end of the second year of $5,850. What is the NPV of this opportunity if the interest rate is 2.3% per year? Should Marian take it? What is the NPV of this opportunity if the interest rate is 2.3% 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 $4,680 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,170 plus an additional investment at the end of the second year of $5,850. What is the NPV of this opportunity if the interest rate is 2.3% per year? Should Marian take it? What is the NPV of this opportunity if the interest rate is 2.3% per year? The NPV of this opportunity is $. (Round to the nearest cent.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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### Investment Opportunity and Net Present Value (NPV) Calculation
**Scenario Description:**
Marian Plunket owns her own business and is considering an investment opportunity. The investment will provide a payment of $4,680 at the end of each of the next 3 years. This opportunity requires an upfront initial investment of $1,170, plus an additional investment of $5,850 at the end of the second year.
**Problem Statement:**
Calculate the Net Present Value (NPV) of this investment opportunity if the interest rate is 2.3% per year. Based on the NPV, determine whether Marian should undertake this investment.
**Graph/Diagram Description:**
N/A (There are no graphs or diagrams in the provided content.)
**Solution Approach:**
To determine whether the investment is viable, we need to calculate its NPV using the given cash flows and interest rate. The formula for NPV is:
\[ \text{NPV} = \sum \frac{C_t}{(1 + r)^t} - \text{Initial Investment} \]
Where:
- \( C_t \) = Cash inflow at time \( t \)
- \( r \) = Discount rate (2.3% in this case)
- \( t \) = Time period
Given cash flows:
- Year 0: -$1,170 (initial investment)
- Year 1: +$4,680
- Year 2: +$4,680 - $5,850 (additional investment)
- Year 3: +$4,680
**Question:**
What is the NPV of this opportunity if the interest rate is 2.3% per year?
The NPV of this opportunity is $ ___ . (Round to the nearest cent.)
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Transcribed Image Text:---
### Investment Opportunity and Net Present Value (NPV) Calculation
**Scenario Description:**
Marian Plunket owns her own business and is considering an investment opportunity. The investment will provide a payment of $4,680 at the end of each of the next 3 years. This opportunity requires an upfront initial investment of $1,170, plus an additional investment of $5,850 at the end of the second year.
**Problem Statement:**
Calculate the Net Present Value (NPV) of this investment opportunity if the interest rate is 2.3% per year. Based on the NPV, determine whether Marian should undertake this investment.
**Graph/Diagram Description:**
N/A (There are no graphs or diagrams in the provided content.)
**Solution Approach:**
To determine whether the investment is viable, we need to calculate its NPV using the given cash flows and interest rate. The formula for NPV is:
\[ \text{NPV} = \sum \frac{C_t}{(1 + r)^t} - \text{Initial Investment} \]
Where:
- \( C_t \) = Cash inflow at time \( t \)
- \( r \) = Discount rate (2.3% in this case)
- \( t \) = Time period
Given cash flows:
- Year 0: -$1,170 (initial investment)
- Year 1: +$4,680
- Year 2: +$4,680 - $5,850 (additional investment)
- Year 3: +$4,680
**Question:**
What is the NPV of this opportunity if the interest rate is 2.3% per year?
The NPV of this opportunity is $ ___ . (Round to the nearest cent.)
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