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HW 8.1 NPV due May 12 @4pm (from Chapter 4) Please see the two slides copied below (chapter 4 slides 8 and 9) and then answer the following questions: 1. What is meant by the "interest rate"? In class, we said this is the rate that the company can borrow money at. Why is this an appropriate rate to use for our calculations of NPV? 2. Suppose all the facts were the same (FV inflow $1,000; PV outflow S950) except that the interest rate was 10 percent instead of 5 percent. Should the company still pursue the project. Answer: no. Explain to a layperson (not a finance or accounting professional) why not. Please do not use the word NPV in your answer. 3. If the interest rate is 10 percent (i.c. question 2 above), what is the project's NPV? Net Present Value - | The Net Present Value (NPV) of an investment is the present value of the expected cash flows, less the cost of the investment. Suppose an investment that promises to pay $10,000 in one year is offered for sale for $9,500. Your interest rate is 5 percent. Should you buy? Net Present Value - || $10,000 NPV = -$9,500+ 1.05 NPV = -$9,500+ $9,523.81 NPV = $23.81 The present value of the cash inflow is greater than the cost. In other words, the Net Present Value is positive, so the investment should be purchased

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