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12 May, 07:01

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?

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  1. 12 May, 07:29
    0
    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
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