Asked by Maren Williams on May 10, 2024
Verified
The Vortex Corp. has an opportunity to invest $1,500,000 in investment A or in investment B. Investment A promises to pay $500,000 profit at the end of the first year, $550,000 at the end of two years, $600,000 at the end of three years, and $625,000 at the end of four years. Investment B promises to pay $25,000 profit at the end of the first year, $100,000 at the end of two years, $600,000 at the end of the third year, and $1,000,000 at the end of four years. Assume that nine percent per year is an appropriate discount rate for each investment. Also, assume a zero scrap value for each investment at the end of four years. Determine which investment promises to be the better of the two for the company.
Discount Rate
The interest rate used to determine the present value of future cash flows in discounted cash flow analysis.
Scrap Value
The estimated worth of a tangible asset at the end of its useful life, often related to material goods that can be recycled or sold for parts.
Investment
The allocation of resources, typically monetary, into assets or projects expected to generate returns or income over time.
- Enhance abilities to appraise the present value of upcoming cash flows and determine the Net Present Value (NPV) of investment undertakings.
- Scrutinize the monetary feasibility of projects employing NPV and assorted options for investment determination.
Verified Answer
CR
Clark RiesenMay 13, 2024
Final Answer :
For each investment we need to calculate the NPV. 
= -C + 
+ 
+ 
... 
For investment A: 
= -C + 
+ 
+ 
... 
= -1,500,000 + 
+ 
+ 
+ 
= -1,500,000 + 458,716 + 462,924 + 463,310 + 442,766
= $327,716
For investment B:
= -1,500,000 + 
+ 
+ 
+ 
= -1,500,000 + 22,936 + 84,168 + 463,310 + 708,425
= $221,161
Thus, investment B should not be undertaken. The company should invest in A.
= -C + + + ... For investment A: = -C + + + ... = -1,500,000 + + + + = -1,500,000 + 458,716 + 462,924 + 463,310 + 442,766= $327,716
For investment B:
= -1,500,000 + + + + = -1,500,000 + 22,936 + 84,168 + 463,310 + 708,425= $221,161
Thus, investment B should not be undertaken. The company should invest in A.
Learning Objectives
- Enhance abilities to appraise the present value of upcoming cash flows and determine the Net Present Value (NPV) of investment undertakings.
- Scrutinize the monetary feasibility of projects employing NPV and assorted options for investment determination.