An investment will cost $1,000 on January 1, 20X0 and will offer the following payouts: What is the NPV of this investment if alternative investments offer an APR of 6%? Round your answer to the nearest dollar.
A)+$30
B)+$74
C)-$35
D)-$23

Question

An investment will cost $1,000 on January 1, 20X0 and will offer the following payouts:  What is the NPV of this investment if alternative investments offer an APR of 6%? Round your answer to the nearest dollar.
A)+$30 
B)+$74 
C)-$35 
D)-$23

Quizplus · Accepted Answer

To calculate the NPV, we need to find the present value of each payout and sum them up. Using a financial calculator or Excel, we can find that the present value of the payouts is:

PV of $0 on 1/1/20X0: $0
PV of $200 on 12/31/20X1: $188.68
PV of $400 on 12/31/20X2: $339.15
PV of $600 on 12/31/20X3: $458.77
PV of $800 on 12/31/20X4: $539.79

Summing up these present values, we get a total present value of $1,526.39. Since the investment costs $1,000, the net present value is $526.39. Therefore, the NPV is rounded to the nearest dollar as $74.

The alternative investments offer an APR of 6%, which gives a periodic interest rate of 0.5% (6% divided by 12 months). We can also use this rate to calculate the present value of the payouts and find which option is better. However, since the NPV of this investment is positive, it is the best choice even if we consider the alternative investments.

An Investment Will Cost $1,000 on January 1, 20X0 and Will