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Homework answers / question archive / Suppose an initial investment of P 5,000 will return P 2,500/year for three years (Assume the P 250 is received each year at the end of the year)
Suppose an initial investment of P 5,000 will return P 2,500/year for three years (Assume the P 250 is received each year at the end of the year). Is this a profitable investment if the discount rate is 20%?
If the NPV is positive, we can conclude that the investment is profitable. Let's calculate the NPV:
NPV = initial investment + ∑ Cash flow in year i/(1+r)i
r= 20% = 0.2, So 1+r = 1.2
NPV = -5000 + 2500/1.2 + 2500/1.2² + 2500/1.2³
= P 266.2
Since NPV >0, this investment is profitable.
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