Question

Your broker calls you and tells you that he has this great investment opportunity: if you invest $100 today, you will receive $40 in one year and $75 in two years. If you require a 15% return on investments of this risk level, should you take the investment?

Answer 1

Answer:

No

Explanation:

The computation of the net present value is shown below:

Year Cash flows Discount factor at 15%      Present values

0         -$100                    1                              -$100   (A)

1          $40            0.8695652174                  $34.78

2          $75            0.7561436673                  $56.71

Present value                                                  $91.49   (B)

Net present value                                   $-8.51  (B - A)

Since the net present value has negative value so the investment should not be accepted

The discount factor should be computed by  

= 1 ÷ (1 + rate) ^ years