Answer to Question #154273 in Microeconomics for Winnie

Question

Evaluate an investment projects and choose best investment option. Bank deposit rate 6% per annum:

1) Investment 2000, gives a profit at the end of the 1st year 200, 2nd year.b. 500, 3.g.b. EUR 1200;

2) a bon (4 coupons) with 500 EUR face value. The annual benefit (coupon payment) is 50 EUR. The term of the bond is 4 years.

Answer 1

If bank deposit rate 6% per annum, then:

1) $NPV = -2,000 + 200/1.06 + 500/1.06^2 + 1,200/1.06^3 = -358.78.$

2) $NPV = -2,000 + 200/1.06 + 200/1.06^2 + 200/1.06^3 + 200/1.06^4 = -1,306.98.$

So, the first option is better.