Peter Has a Business Opportunity That Requires Him to Invest

question 27

Multiple Choice

Peter has a business opportunity that requires him to invest $10,000 today,and receive $12,000 in one year.He can either use $10,000 that he already has for this investment or borrow the money from his bank at an interest rate of 10%.However,the $10,000 he has right now is needed for urgent repairs to his home,repairs that will cost at least $15,000 if he delays them for a year.Should Peter undertake the investment?

• A)No,since the net present value (NPV)of the investment,should he take it,is less than the net present value (NPV)of the home repairs if he delays them for one year.
• B)Yes,since he can borrow the $10,000 from a bank,repair his home,invest $10,000 in the business opportunity,which,since it has a NPV > 0 will mean he will still come out ahead after repaying the loan.
• C)Yes,since the net present value (NPV)of the investment is greater than zero he can invest the $10,000 in the business opportunity,and then next year use this money plus the benefit from this money to make the necessary home repairs.
• D)Yes,since the net present value (NPV)of the investment,should he take it,is greater than the net present value (NPV)of the home repairs if he delays them for one year.
• E)No,since the net present value (NPV)of both the investment and the repairs are the same.

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Definitions:

Put Option

A monetary contract enabling the holder the choice, though not the requirement, to sell an established amount of a base asset at a predetermined rate within a set timeframe.

Hedge

An investment made to reduce the risk of adverse price movements in a security, often by taking an offsetting position in a related security.

Market Price

The current cost at which you can buy or sell an asset or service.

Bushels

A bushel is a unit of volume that is used in the United States for measuring quantities of agricultural produce, such as grains or fruits.