Investment opportunity and business decisions making based on net present value and rate of return.

**Net Present Value**

Net present value can be calculated by subtracting the required investment from the present value.

## NPV = PV – Investment

**Example 1.**

The price of a flat is $100,000. But it could be sold out for $130,000 after two years. If the prevailing interest rate is 10% whether the investment is a good opportunity?

**Solution:**

First find present value of the selling price after two years

Now, calculate the Net Present Value

Since, the Net Present Value is positive. In this case it is $7,438 means your wealth will be increased by $7,438. So, it is a good investment opportunity.

**Investment Decision Rule-I**

Accept investments that have positive net present value.

**Present Values and Rates of Return**

Rate of return is simply profit as a proportion of the initial investment

**Example 2.**

The price of a flat is $100,000. But it could be sold out for $130,000 after two years. If the interest rate on a risk less government bond is 10% but a corporate bond is offering 20% attractive rates, then whether the investment in purchasing the flat is a good opportunity if the risk on purchasing the flat and corporate bond is equal?

**Solution:**

In this case, the rate for opportunity cost of capital is 20%. And, the rate of return in purchasing flat is

Since, the 30% return on flat exceeds the 20% opportunity cost. So, it is a better investment opportunity.

**Investment Decision Rule-II:**

Accept investments that offer rates of return in excess of their opportunity costs of capital.