If an investment projects offers to pay $200 in year 1 and $200 in year 2, and the interest rate is 5%, the investment rule states that you should invest in the project as long as the cost is less than:

Question

Quizplus · Accepted Answer

To determine the cost of the investment, we need to calculate the present value of the cash flows using the interest rate of 5%.

PV of cash flow in year 1 = $200/(1+0.05)^1 = $190.48

PV of cash flow in year 2 = $200/(1+0.05)^2 = $181.41

Total cost of investment = $190.48 + $181.41 = $371.89

Therefore, the cost of the investment is less than option B, so we should invest in the project.

If an Investment Projects Offers to Pay $200 in Year