Question #82709

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Answer 1 · 2017-10-05T22:20:06

See below

(i) The equation to calculate Net Present Value (NPV) is:

#NPV=sumC_t/(1+r)^t - C_o#

where:

#C_t# = net cash inflow during the period t

#C_o# = total initial investment costs

#r# = discount rate

#t# = number of time periods

Since #t=1#, the equation becomes:

#NPV=C_1/(1+r) - C_o#

Substituting the given numbers:

#NPV=2.18/(1+0.10) - 2#

#NPV=-.022#

A negative NPV result in a net loss so it isn't a good investment.

ii) Let's solve this equation for #r#:

#NPV=C_1/(1+r) - C_o#

#NPV + C_o=C_1/(1+r)#

#(1+r)(NPV + C_o)=C_1#

#(1+r)(C_o)=C_1#

#C_0+(C_o)(r))=C_1#

#r=(C_1-C_o)/C_o#

#r=(2.18-2)/2=0.09# = #9# percent