Suppose you make a $5,000 investment that will return $3,000 in year 2 and another $3,500 in year 4.With an interest rate of 4.5%,what is the NPV of this project?
A) $247.34
B) $682.15
C) $1,500.00
D) $2,162.50

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount each future cash flow to its present value using the interest rate of 4.5%.

For Year 2: 
Discount factor = 1 / (1 + 0.045)^2 = 0.9135 
Present value = $3,000 x 0.9135 = $2,740.50

For Year 4: 
Discount factor = 1 / (1 + 0.045)^4 = 0.8607 
Present value = $3,500 x 0.8607 = $3,015.45

Total present value of cash flows = $2,740.50 + $3,015.45 = $5,755.95

Minus initial investment of $5,000: 
NPV = $5,755.95 - $5,000 = $755.95

Therefore, the best choice is B, with an NPV of $682.15 (rounded to the nearest cents).

Suppose You Make a $5,000 Investment That Will Return $3,000