Problem
1. Marian Plunket owns her business and is considering an investment. The opportunity requires an initial investment of 10000 plus an additional investment at the end of the second year of $5000.
If she undertakes the investment, it will pay $4000 at the end of each of the next three years. What is the NPV of this investment opportunity if the cost of capital is 2%?
2. If the incoming cash flows become: pay $4000 at the end of each of the next three years; and pay $360 at the end of year 4 and thereafter decreases at a constant rate of 6% until forever.
Suppose the cost of capital and the costs of the investment are the same as in #1. What is the NPV of this investment opportunity?