Investment Decisions

A Discussion On Investment Decisions As manager of short-term projects, you are trying to decide whether or not to invest in a short-term project that pays one cashflow of $1,000 one year from today The total cost of the project is $950 Your alternative investment is to deposit the money in a one-year bank Certificate of Deposit which will pay 4% compounded annually

a Assuming the cash flow of $1,000 is guaranteed (there is no risk you will not receive it) what would be a logical discount rate to use to determine the present value of the cash flows of the project?

b What is the present value of the project if you discount the cash flow at 4% per year? What is the net present value of that investment?
Should you invest in the project?

c What would you do if the bank increases its quoted rate on one-year CDs to 55%?

d At what bank one-year CD rate would you be indifferentbetween the two investments?


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