Question

Suppose that you can invest $20,000 in a business that guarantees you only the cash flows at the end of years 2, 3, and 5 as indicated in Table 1. Assume an interest rate of 7% compounded annually. Year 2 3 5 Cash Flow ($) 10,000 8,000 6,000 Table 1 Which of the following options is true? A. The investment will be undertaken because the total cash flow for the three years is greater than your initial investment. B. It would be better to invest the $20,000 in a bank paying 7%. C. The mathematical calculation of future profits today recommends the investment project should be undertaken. D. The internal rate of return of this investment project is 7%, and therefore, the Net Present Value is zero. E. Not enough information is supplied to provide an answer.

          Suppose that you can invest $20,000 in a business that guarantees you only the
cash flows at the end of years 2, 3, and 5 as indicated in Table 1. Assume an interest
rate of 7% compounded annually.
Year
2
3
5
Cash Flow ($)
10,000
8,000
6,000
Table 1
Which of the following options is true?
A. The investment will be undertaken because the total cash flow for the three
years is greater than your initial investment.
B. It would be better to invest the $20,000 in a bank paying 7%.
C. The mathematical calculation of future profits today recommends the
investment project should be undertaken.
D. The internal rate of return of this investment project is 7%, and therefore, the
Net Present Value is zero.
E. Not enough information is supplied to provide an answer.

Show more…

Suppose that you can invest 20,000 in a business that guarantees you only the
cash flows at the end of years 2, 3, and 5 as indicated in Table 1. Assume an interest
rate of 7% compounded annually.
Year
2
3
5
Cash Flow ()
10,000
8,000
6,000
Table 1
Which of the following options is true?
A. The investment will be undertaken because the total cash flow for the three
years is greater than your initial investment.
B. It would be better to invest the 20,000 in a bank paying 7%.
C. The mathematical calculation of future profits today recommends the
investment project should be undertaken.
D. The internal rate of return of this investment project is 7%, and therefore, the
Net Present Value is zero.
E. Not enough information is supplied to provide an answer.

Added by Ryan C.

Principles of Economics

Gregory Mankiw 8th Edition

Instant Answer

Solved by Expert Jerelyn Nevil

08/21/2024

Step 1

The cash flows are $10,000 at the end of year 2, $8,000 at the end of year 3, and $6,000 at the end of year 5. The interest rate is 7% compounded annually. Show more…

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Transcript

00:01 Okay, so i see that you need help with this and it says suppose that you can invest $20 ,000 in a business that guarantees you only the cash flows at the end of years, two, three, and five as indicated in table one.

00:21 Assume an interest rate of 7 % compounded annually.

00:33 Which of the following is true? so it gives options a, b, c.

00:38 And d so first let's calculate the present value of each cash flow using the formula for present value so i'm going to take for present value year two i'm going to take 10 000 and i'm going to divide that by 1 .07 raised to the second power and so that is going to be 8 ,727 .27 in 207.

01:08 Seven cents then present value for year three you're going to take the eight thousand and you're going to divide it by one point zero seven raised to the third power and that is going to be six thousand five hundred thirty dollars and sixty one cents then present value for year five you're going to take six thousand and then you're going to divide that by um one point zero seven raised to the fifth power and that is going to be $4 ,277 in 93 cents.

01:47 Then you're going to take all of these and you're going to add them together to get $19 ,535 .81.

01:56 So since the total present value of the cash flows is less than the initial investment, a is not true.

02:03 Now let's consider option b.

02:06 If you were to invest $20 ,000 in the bank paying 7 % interest compounded annually, then you're going to take 20 ,000 times 1 .07 raised to the fifth power and you are going to get $28 ,052.

02:31 Comparing this to the total cash flows from the business, it's clear that the business provides a higher return...

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