Answer:
The NPV is positive. The investment is good, therefore the owners made a correct investment decision
Explanation:
To determine whether or not the investment was right, we will need to determine the net present value of the investment (NPV).
The NPV is the difference between the PV of cash inflows and the PV of cash outflows. A positive NPV implies a good investment decision and a negative figure implies the opposite.
NPV of an investment:
NPV = PV of Cash inflows - PV of cash outflow
PV of annuity= 1 -(1+r)^(-n)/r × Annual cash flow
PV of 11 million annuity for 5 years
= ( 1 - (1.053)^(-5))/0.053) × 11,000,000
= 4.2938× 11,000,000
= $47,231,874.4
NPV of the investment
= 47,231,874.4 - $25,000,000
= $22,231,874.40
The NPV is positive. The investment is good, therefore the owners made a correct investment decision.
