Mr.Dell has $100 income this year and zero income next year.The market interest rate is 10% per year.Mr.Dell also has an investment opportunity-having the same risk as the market in which he can invest $50 this year and receive $80 next year.Suppose Mr.Dell consumes $50 this year and invests in the project.What is the NPV of the investment opportunity?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount the future cash flow back to the present value using the market interest rate. The NPV can be calculated as:
NPV = -Initial investment + Present value of future cash flow
NPV = -$50 + $80/(1+0.10)
NPV = -$50 + $72.73
NPV = $22.73

Therefore, the investment opportunity has a positive NPV of $22.73, which means it is a profitable investment. Mr. Dell should invest in the project to maximize his wealth.

MrDell Has $100 Income This Year and Zero Income Next