NPV Method Walkthrough

Omar Pineiro
Omar Pineiro
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Published 2023-04-10
This is the Question we worked on
You have 100 000$ saving that is very important for you. You want to invest it for the next two years. You don’t know if it is better to invest in stock or buy a home.
If you invest in stock, for the first year there is 40% chance you earn 20% and 60% chance that you lose 5% . For the second year there is 30% chance of 30% increase and 70% chance of 10% increase in the market.

If you buy a home, for the first year, the value of your home will go up 5% by the chance of 20% and it may go down 10% by chance of 80%. For the second year, there is 50% chance that the value of home goes up 15% and 50% chance that the home prices go down 20%. (Hint: assume we took care of all the costs related to home in the value calculation)

Use the NPV methodology to see which option is better for you for the next two years? k is 0.1.
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