Fin515 – week 2 – problem set
If the interest rate for the opportunity is 6% per annum, the net present value (NPV) can be determined using a discounted cashflow analysis. To determine the current value of cash flow, this involves taking all anticipated cash flows into consideration and discounting them at a specific rate. Assuming an investment of $20,000 and annual payments of $5,000 for five years, the DCF calculation will give an NPV value of $10.980 ($20,000 + 5.x 0.94 x 55,000).
The rate at which you want to return and the risks associated with this investment will ultimately determine whether or not it is worth your time. It might be worth considering if your anticipated return exceeds 6%. However, if your goal is to earn 6% or less and/or you have significant risk then it may be worth exploring other investments that provide better returns.
Overall understanding the financial implications behind any decision is essential for making informed decisions when investing money so that one’s investments yield maximum benefit while minimising potential losses at the same time.