Mr.Dell has $100 income this year and zero income next year.The expected return from investing in the stock market is 10 percent a 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 find the NPV, we need to calculate the present value of the future cash flows adjusted for the opportunity cost of capital (10%):

PV(costs) = -$50

PV(benefits) = $80/(1+10%) = $72.73

NPV = PV(benefits) - PV(costs) = $72.73 - (-$50) = $122.73

Since the initial income of $100 is already taken care of, Mr. Dell can afford to consume the $50 and still be able to invest in the project, yielding a positive NPV of $22.73. Therefore, the best choice is to invest in the project.

MrDell Has $100 Income This Year and Zero Income Next