Question

Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now. 34) If the appropriate interest rate is 10%, what should Nielson Motors do

Answer 1

Answer:

NPV = 87,528.18

The company should invest.

Explanation:

Giving the following information:

Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now.

We need to calculate the net present value. If the NPV is positive, the company should invest. The project will increase the value of the company.

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

Year1= 250,000/ (1.10)= 227,272.73

Year2= 450,000 / (1.10^2)= 371,900.83

Year3= 650,000/ 1.10^3= 488,354.62

Total= 1,087,528.18

NPV = - 1,000,000 + 1,087,528.18= 87,528.18