Sarah is considering lending an amount of $45,000 to her friend who promises to return $60,000 after the end of ten years
What is the net present value of Sarah's investment? Is it worthwhile to undertake this investment? Assume that the market rate of interest is 6%.
The cost of this investment to the investor is $45,000 and the benefit is $60,000.
The present value of the amount received after ten years is given by $60,000/(1.06 )10 = $33,504 approximately.
Hence the net present value of the project is $(33,504 - 45,000 ) = -$11,496.
Because the net present value is negative, it is not worthwhile undertaking this investment.
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