Allan decides to invest in a new company which would allow him to receive $250,000 at the end of each year for the next 5 years.He purchases 100,000 shares at the price of $6.50.What is the NPV of a single share,if the interest rate is 15% per year?

Question

Quizplus · Accepted Answer

First, we calculate the present value of the 5-year annuity using the formula:
PV = C * (1 - (1 + r)^-n) / r
where PV is the present value, C is the annual cash flow, r is the discount rate, and n is the number of years.

PV = 250,000 * (1 - (1 + 0.15)^-5) / 0.15
PV = 827,974.38

Next, we calculate the total cost of purchasing 100,000 shares:
Cost = 100,000 * 6.50
Cost = 650,000.00

Finally, we calculate the net present value of a single share using the formula:
NPV = (PV - Cost) / Number of Shares

NPV = (827,974.38 - 650,000.00) / 100,000
NPV = 1.7797438

Therefore, the NPV of a single share is $1.78, which is closest to answer choice B ($1.88).

Allan Decides to Invest in a New Company Which Would