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Capital Budgeting : Net Present Value

a. You are offered an investment with returns of $2,237 in year 1, $3,748 in year 2, and $3,493 in year 3. The investment will cost you $8,746 today. If the appropriate Cost of Capital (quoted interest rate) is 9.8%, what is the Profitability Index of the investment?

b. You are offered an investment with returns of $1,595 in year 1, $4,389 in year 2, and $3,585 in year 3. The investment will cost you $6,264 today. If the appropriate Cost of Capital (quoted interest rate) is 6.9%, what is the Net Present Value of the investment?

c. You are offered an investment with returns of $2,834 in year 1, $4,508 in year 2, and $5,384 in year 3. The investment will cost you $5,298 today. If the appropriate Cost of Capital (quoted interest rate) is 9.2%, what is the Net present Value of the investment?

Solution Preview

Please refer attached file for better clarity of tables.

Year End Cash Flow PV factor PV
n Cn PVF=1/(1+9.8%)^n C*PVF
1 2237 0.9107 2037.34
2 3748 0.8295 3108.82
3 3493 0.7554 2638.71
...

Solution Summary

There are three problems. Solutions to these problems explain the methodology to calculate net present value.

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