You are offered an investment opportunity that costs you $28,000, has an NPV of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows: The missing cash flow from year 2 is closest to:

Question

You are offered an investment opportunity that costs you $28,000, has an NPV of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows:  The missing cash flow from year 2 is closest to:

Quizplus · Accepted Answer

To solve the missing cash flow, we first need to calculate the present value of the investment, which is $2,278. To do this, we can use the formula:

PV = CF / (1 + r)^n

where PV is the present value, CF is the cash flow, r is the interest rate, and n is the number of years.

In this case, we know that PV = $2,278, r = 10%, and n = 3. We can solve for CF:

CF = PV x (1 + r)^n

CF = $2,278 x (1 + 0.1)^3

CF = $2,278 x 1.331

CF = $3,033

Now we can subtract the known cash flows from the investment to find the missing cash flow:

$3,033 = $10,000 + X + $6,000

X = $3,033 - $10,000 - $6,000

X = -$12,967 (negative indicates an outflow)

This means that the investment requires an additional cash outflow of $12,967 in year 2. However, since none of the answer choices correspond to a negative cash flow, we need to choose the closest positive answer, which is B) $12,000.

You Are Offered an Investment Opportunity That Costs You $28,000