Consider the following investment/dividend opportunities facing a company:
Assume that the interest rate in the capital market is 12 per cent per period.What is the NPV of Project Mini?

Question

Consider the following investment/dividend opportunities facing a company: 
Assume that the interest rate in the capital market is 12 per cent per period.What is the NPV of Project Mini?

Quizplus · Accepted Answer

To calculate the NPV of Project Mini, we can use the formula:
NPV = (-Initial Cost) + (PV of all expected cash inflows)
The initial cost of Project Mini is $300. The expected cash inflows are $100 in year 1, $150 in year 2, and $200 in year 3. To calculate the PV of these cash inflows, we need to use the formula:
PV = (Cash inflow) / (1 + r)^n
where r is the interest rate and n is the number of periods.

Using this formula, we get:
PV of cash inflow in year 1 = 100 / (1 + 0.12)^1 = $89.29
PV of cash inflow in year 2 = 150 / (1 + 0.12)^2 = $106.19
PV of cash inflow in year 3 = 200 / (1 + 0.12)^3 = $118.88
Total PV of cash inflows = $314.36

Therefore, the NPV of Project Mini is:
NPV = (-300) + 314.36 = $14.36

Since the NPV is positive, choosing Project Mini is a good investment. However, we need to compare it with the other options to determine the best choice.

Consider the Following Investment/dividend Opportunities Facing a Company