Question

A friend of yours needs to decide whether or not to invest in a multiyear project. If your friend decides not to invest the project, he or she has nothing to lose or gain. If your friend decides to invest the project, the initial cost is $14,000. The annual revenue is estimated to be $5,000 per year for six years but could vary between $2,500 and $7,000. Your friend estimates that the cost of capital (interest rate) is 11%, but it could be as low as 9.5% and as high as 12%. The basis of the decision to invest will be whether the project has a positive net present value.

Answer 1

To determine whether the project has a positive net present value, your friend needs to calculate the net present value (NPV) of the project. The NPV is calculated by discounting the future cash flows of the project to their present value and subtracting the initial investment. By comparing the different NPVs calculated using different interest rates and potential annual revenues, your friend can make an informed decision on whether to invest in the multiyear project.

Step-by-step explanation:

The subject of this question is Business.

In order to determine whether the project has a positive net present value, your friend needs to calculate the net present value (NPV) of the project. The NPV is calculated by discounting the future cash flows of the project to their present value and subtracting the initial investment. If the NPV is positive, it means that the project is expected to generate more value than the initial cost, and your friend should invest in it.

Your friend estimates the cost of capital (interest rate) at 11%, but it could range between 9.5% and 12%. To calculate the NPV, your friend should use the different potential annual revenues and discount them using the different interest rates. By comparing the different NPVs calculated, your friend can make an informed decision on whether to invest in the multiyear project.