Suppose you make $1,000 investment today that you believe will have a one-time return of $2,500 in 5 years.If the interest rate is 12%,will you have a profitable investment?
A) Yes, because the NPV is positive
B) Yes, because the NPV is negative
C) No, because the NPV is positive
D) No, because the NPV is negative

Question

Quizplus · Accepted Answer

To determine if the investment is profitable, we need to calculate the net present value (NPV).

NPV = Present Value of Future Cash Flows - Initial Investment

Present Value of $2,500 in 5 years at 12% interest rate can be calculated as:

PV = $2,500 /(1+0.12)^5 = $1,325.48

So, NPV = $1,325.48 - $1,000 = $325.48

Since the NPV is positive, the investment is profitable. So, the correct answer is A.

Suppose You Make $1,000 Investment Today That You Believe Will