Scenario: Tom has two investment options. He can either invest $3,000 in a friend's project or he can deposit the same amount in a bank that offers him an annual rate of interest of 6 percent. If he invests in his friend's project, he will receive $3,400 after 5 years.
-Refer to the scenario above.What is the net present value of his friend's project?

Question

Quizplus · Accepted Answer

The net present value (NPV) of his friend's project can be calculated using the formula NPV = P / (1 + r)^n - C, where P is the future value of the investment, r is the annual interest rate, n is the number of years, and C is the initial investment. Here, P = $3,400, r = 0.06, n = 5, and C = $3,000. Plugging these values into the formula gives NPV = $3,400 / (1 + 0.06)^5 - $3,000 = $3,400 / 1.338225577 - $3,000 ≈ $2,540.68 - $3,000 = -$459.32.

Scenario: Tom Has Two Investment Options