You have been offered a unique investment opportunity. If you invest $10,400 today, you will receive $520 one year from now, $1,560 two years from now, and $10,400 ten years from now. What is the NPV of the opportunity if the cost of capital is 6.5% per year?

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
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You have been offered a unique investment opportunity. If you invest $10,400 today, you will receive $520 one year from now, $1,560 two years from now, and $10,400 ten years from now. What is the NPV of the opportunity if the cost of capital is 6.5% per year?

Expert Solution
Formula and inputs

NPV = Present value of future cash inflows - Initial investment

 

Calculation of present value of future cash inflows

 

Present value = (D1 * (1+r)-1)+ (D2 * (1+r)-2)+(D10 * (1+r)-10

Where

r = Required rate of return (6.5%)

D= Cashflow for year 1 ($520)

D= Cashflow for year 2 ($1560)

D10 = Cashflow for year 10 ($10400)

 

Present value = (520 * (1+0.065)-1)+ (1560 * (1+0.065)-2)+(10400 * (1+0.065)-10

Present value = (520 * (1.065)-1)+ (1560 * (1.065)-2)+(10400 * (1.065)-10

Present value = (520 * 0.938967136150235)+ (1560 * 0.881659282770174)+(0.532726035520529)

Present value = 488.262910798122+ 1375.38848112147 +5540.3507694135

Present value = 7404.00216133309

Present value = $7404.00

 

 

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