Mr. Dell has $100 income this year and zero income next year. The expected return from investing in the stock market is 10 percent a year. Mr. Dell also has an investment opportunity-having the same risk as the market in which he can invest $50 this year and receive $80 next year. Suppose Mr. Dell consumes $50 this year and invests in the project. What is the NPV of the investment opportunity?
A)$0
B)$5
C)$22.73
D)none of the options

Question

Quizplus · Accepted Answer

The NPV is calculated as the present value of future cash flows minus the initial investment. The future cash flow is $80, and the discount rate is 10%. NPV = $80 / (1 + 0.10) - $50 = $72.73 - $50 = $22.73.

Mr Dell Has $100 Income This Year and Zero Income