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    Hi, im confused about what to do on this question. I've had a go but i may be doing the wrong thing. Would some let me know please

    A firm has an investment oppurtunity which requires an expenditure now of £25,000. Its anticipated return will be £18,000 in one years time and £8000 in two years time. Find the present value of this investment oppurtunityif the oppurtunity cost capital is 8%, and use your answer to suggest whether you would advise the firm to undertake the investment or not.

    18,000 + 8,000 = 26,000

    26,000 = (25,000) (x)^2

    26,000/25,000 = 1.04 = x^2

    2 square root(1.04) = 1.04 = 4%

    Cheers
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    Can you write down your definition of the "opportunity cost capital".
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    the rate of return investors could earn now or later
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    Assume that the opportunity cost capital is the effective rate of interest per year you would receive on government bonds (ie. you can get this rate of interest with no risk).

    We have to find out what the present value of 18000 at time 1 and 8000 at time 2 is? (ie. how must would be a fair price to pay now for these cashflows in the future)

    If this present value is greater than 25000, then we would advise the company to undertake the investment (because we would be paying less than the fair price we worked out).

    If this present value is less than 25000, then we would advise them not to take the investment opportunity.
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    Here is my solution. I don't know whether it is correct.

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    That looks reasonable, if someone could confirm if this is correct it would be greatful.

    Thanks
 
 
 
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