evaluation of an investment opportunity

Question

Your friend offered you an investment opportunity: with an initial investment of $1000 today, you will receive $500 at the end of each of the next 3 years.  Otherwise, you could earn 10% per year on your money from the bank. Should you undertake the investment opportunity?

Answer 1

To decide whether you should accept this investment opportunity, you can compute the NPV of all the cashflows of the project.

The timeline of the cashflows are:

T0: -$1000

T1, T2, T3: $500 each

the discount rate r= 10%, 1+r = 1.1

NPV = -1000 + 500/(1+r) + 500/(1+r)^2 + 500/(1+r)^3

       = -1000 + 500/1.1 + 500/1.1^2+ 500/1.1^3

       = 243.4

NPV is positive, you should undertake the investment opportunity!