If $10,000 is invested in a certain business at the start of the year, the investor will receive $3000 at the end of each of the next four years. What is the net present value of this business opportunity if the interest rate is 7% per year?

Question

Quizplus · Accepted Answer

We can use the formula for the present value of an annuity to calculate the net present value (NPV) of the investment:

NPV = -$10,000 + $3000/(1+0.07)^1 + $3000/(1+0.07)^2 + $3000/(1+0.07)^3 + $3000/(1+0.07)^4

NPV = -$10,000 + $2,803.74 + $2,614.53 + $2,433.48 + $2,259.15

NPV = $161.63

Therefore, the net present value of this business opportunity is $161.63. Choice C is the correct answer.

If $10,000 Is Invested in a Certain Business at the Start