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)

Economics Dec 05, 2020

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%?

Expert Solution

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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