Description
1. a. Yes/No ________: Should your company invest $1,000,000 today in order to return net profit of $1,500,000 five years from now? Discount, using an interest rate of 12.0%. Show your work.
b. Yes/No ________: Should your company invest $1,000,000 today in order to return net profit of $1,500,000 five years from now? Discount, using an interest rate of 6.0%. Show your work.
2. For #1b, what is your decision if there is only an 80% probability of achieving the $1,500,000 five years from now? Show your work.
3. Use the following stream of revenue and expenses for a proposed corporate investment:
Year Expense Revenue
0 $1,000,000
1
2
3 $500,000
4 $700,000
5
6 $100,000
7 $1,700,000
a. What is the Net Present Value of the project, using an interest rate of 8.0%? Should you undertake the project?
b. If all the expenses have a 100% probability of being accurate, but the revenue in Year 4 has a 90% probability and the revenue in Year 7 has an 80% probability, what is the "expected" Net Present Value of the project, using an interest rate of 8.0%? Should you undertake the project?
Explanation & Answer
Kindly find the attached solutions.
1
Business Finance
Surname
Institutional Affiliation
2
Question 1a
No. You should not invest.
Workings:
To determine the future value of the investment, discount $1,000,000 at 12% for 5 years using
the formula below:
FV= P (1+R)N where FV is the future value, P the principal amount, R the interest rate and N the
time
FV= $1,000,000(1+0.12)5 = $1,762,342
Since you will get $1,500,000 which is lower than $1,762,...