Use the following information to answer the question(s)below.
Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now,$450,000 two years from now,and $650,000 three years from now.
-If the appropriate interest rate is 10%,then the NPV of this opportunity is closest to:
A)($88,000).
B)$88,000.
C)$300,000.
D)$1,300,000.

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount the future cash flows back to the present using the appropriate interest rate. The formula for NPV is:
NPV = -initial investment + (cash flow 1 / (1 + interest rate)^1) + (cash flow 2 / (1 + interest rate)^2) + (cash flow 3 / (1 + interest rate)^3)

Plugging in the numbers, we get:
NPV = -1,000,000 + (250,000 / 1.1^1) + (450,000 / 1.1^2) + (650,000 / 1.1^3)
NPV = -1,000,000 + 226,611.57 + 381,366.86 + 474,191.69
NPV = $88,169.12

So the answer is B, $88,000 (rounded to the nearest thousand). The investment is profitable because the NPV is positive.

Use the Following Information to Answer the Question(s)below