Your broker calls you and tells you that he has this great investment opportunity: if you invest $100 today, you will receive $40 in one year and $75 in two years. If you require a 15% return on investments of this risk level, should you take the investment?

No

Explanation:

The computation of the net present value is shown below:

Year Cash flows Discount factor at 15% Present values

0 - $100 1 - $100 (A)

1 $40 0.8695652174 $34.78

2 $75 0.7561436673 $56.71

Present value $91.49 (B)

Net present value $-8.51 (B - A)

Since the net present value has negative value so the investment should not be accepted

The discount factor should be computed by

= 1 : (1 + rate) ^ years