Kresta can invest in a scheme which will pay $10,000 at the end of each of the next four years.She must make an investment at the start of the first year of $32,000.Should she make this investment,given that the interest rate is 7%?
A)Yes,because the net present value (NPV)is negative.
B)Yes,because the net present value (NPV)is positive.
C)No,because the net present value (NPV)is negative
D)No because the net present value (NPV)is positive.
E)No,because the net present value (NPV)is zero.

Question

Quizplus · Accepted Answer

To determine whether Kresta should make the investment, we need to calculate the net present value (NPV) of the cash flows.

Using a financial calculator or spreadsheet, we can calculate the NPV as follows:

CF0 = -32000 (initial investment) 
CF1-4 = 10000 
I/Y = 7% 
NPV = $5,430.40

Since the NPV is positive, it means that the investment is expected to generate a return greater than the required rate of return (7%). Therefore, Kresta should make the investment.

Kresta Can Invest in a Scheme Which Will Pay $10,000