Answer:
Instructions are below.
Explanation:
Giving the following information:
Initial investment= $225,000
The project generates profits of $90,000 each year for the next three years.
<u>To determine whether it is convenient or not to invest, we need to calculate the net present value (NPV). If the NPV is positive, the project should proceed. </u>
NPV= -Io + ∑[Cf/(1+i)^n]
A)
Year 1= 90,000/1.11= 81,081.08
Year 2= 90,000/1.11^2= 73,046.02
Year 3= 90,000/1.11^3= 65,807.22
Total= 219,934.32
NPV= -225,000 + 219,034.32= -$5,965.68
With a discount rate of 11%, the project is not profitable.
B)
Year 1= 90,000/1.05= 85,714.29
Year 2= 90,000/1.05^2= 81,632.65
Year 3= 90,000/1.05^3= 77,745.38
Total= 245,092.32
NPV= -225,000 + 245,092.32= 20,092.32
Under a discount rate of 5%, the project is convenient.
