Question

You have an opportunity to invest $100,000 now in return for $79,300 in one year and $30,300 in two years. If your cost of capital is 8.8%, what is the NPV of this investment?

Answer 1

To calculate the Net Present Value (NPV) of the investment, we discount the future cash flows back to the present using the cost of capital.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of the investment, we need to discount the future cash flows back to the present using the cost of capital. The NPV formula is:

NPV = CF0 + CF1 / (1+r) + CF2 / (1+r)^2

Where CF0 is the initial investment, CF1 is the cash flow in year 1, CF2 is the cash flow in year 2, and r is the cost of capital.

Applying the formula to the given numbers, we have:

NPV = -100,000 + 79,300 / (1+0.088) + 30,300 / (1+0.088)^2 = $