Tom has two investment options. He can either invest $3,000 in a friendʹs 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 friendʹs 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 for NPV, which is the present value of cash inflows minus the initial investment. The present value of receiving $3,400 after 5 years at an annual discount rate of 6% is calculated as $3,400 / (1 + 0.06)^5 = $2,540.68. Subtracting the initial investment of $3,000 gives an NPV of $2,540.68 - $3,000 = -$459.32.

Tom Has Two Investment Options