Investment opportunity

You have been offered a unique investment opportunity. If you invest $10,000 today, you will receive $500 one year from now, $1500 two years from now, and $10,000 in 10 years.

a. What is the NPV of the opportunity if the cost of capital is 6% per year? Should you take the opportunity?

b. What is the NPV of the opportunity if the cost of capital is 2% per year? Should you take it now

1. How is the NPV rule related to the goal of maximizing shareholder wealth?

2. What is the intuition behind the payback rule? What are some of its drawbacks?

3. What is the intuition behind the IRR rule? What are some of its drawbacks?

4. Under what conditions will the IRR rule and the NPV rule give the same accept/reject decision?

Solution:

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