You have been offered the following investment opportunity: if you pay $2500 today,you will receive $1000 at the end of each of the next three years.Assuming that you could otherwise earn 10% per year on your money,the net present value (NPV)for this opportunity is closest to:
A)$12
B)$18
C)-$13
D)$500
E)-$18

Question

Quizplus · Accepted Answer

We can calculate the NPV using the formula NPV = (-Initial Investment) + (Cash flow year 1/1+r^1) + (Cash flow year 2/1+r^2) + (Cash flow year 3/1+r^3). Plugging in the numbers, we get NPV = (-2500) + (1000/1.1) + (1000/1.1^2) + (1000/1.1^3) = -$13.22, which is closest to option C. Since the NPV is negative, it means that the investment opportunity is not worth it as we could earn more than $2500 by investing our money elsewhere.

You Have Been Offered the Following Investment Opportunity: If You