Use the following information to answer the question(s)below.
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 appropriate interest rate is 10%,then Nielson Motors should:
A)invest in this opportunity since the NPV is positive.
B)not invest in this opportunity since the NPV is positive.
C)invest in this opportunity since the NPV is negative.
D)not invest in this opportunity since the NPV is negative.

Question

Quizplus · Accepted Answer

To determine if an investment opportunity is worthwhile, we need to calculate the net present value (NPV) of the investment. NPV is the present value of the cash inflows minus the present value of the cash outflows. We need to discount each cash inflow by the appropriate interest rate to determine its present value.

Using an interest rate of 10%, we can calculate the present value of each cash inflow as follows:

PV of Year 1 Cash Inflow = $250,000 / (1 + 0.10)^1 = $227,273
PV of Year 2 Cash Inflow = $450,000 / (1 + 0.10)^2 = $372,727
PV of Year 3 Cash Inflow = $650,000 / (1 + 0.10)^3 = $475,567

Then, we can calculate the NPV by subtracting the initial investment of $1,000,000 from the sum of the present values:

NPV = $227,273 + $372,727 + $475,567 - $1,000,000 = $76,567

Since the NPV is positive, Nielson Motors should invest in this opportunity.

Use the Following Information to Answer the Question(s)below