Question

Nielson Motors is considering an opportunity that requires an investment of​ $1,000,000 today and will provide​ $250,000 one year from​ now, $450,000 two years from​ now, and​ $650,000 three years from now.
If the appropraite interest rate is 10%, then Nielson Motors should:

a. Do not invest in this opportunity since the NPV is negative.
b. Invest in this opportunity since the NPV is negative.
c. Invest in this opportunity since the NPV is positive.
d. Do not invest in this opportunity since the NPV is positive.

Answer 1

Answer:

The correct answer is B.

Explanation:

Giving the following information:

Nielson Motors is considering an opportunity that requires an investment of​ $1,000,000 today and will provide​ $250,000 one year from​ now, $450,000 two years from​ now, and​ $650,000 three years from now.

The appropriate interest rate is 10%.

We need to calculate the net present value using the following formula:

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

Cf1= 250,000/1.10= 227,272.73

Cf2= 450,000/1.10^2= 371,900.83

Cf3= 650,000/1.10^3= 488,354.62

NPV= -1,000,000 + 1,087,528.18= 87,528.18

If the NPV is positive, the investment increases the value of the company.