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Elgar has $10,000 to invest for five years. He could deposit it in a bank, earning 8% per year compound interest.
He has been offered an alternative: investment in a low-risk project expected to produce net cash inflows of $3,000 for each of the first three years, $5,000 in the fourth and $1,000 in the fifth year. choosing which one is better?
considering NPV of the project, Elgar can maximise the wealth by $2087. however, considering future value by investing the bank he can get $14,693.28it and it did not increase the wealth. so, is choosing the low-risk project better investment?In Paper MA you cannot be expected to comment on the risk involved. The decision is based solely on the NPV (or future value given the decision would be the same).
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