Net Present Value (NPV) Calculation: Is a Training Investment Profitable?

The statement that the net present value (NPV) of this investment is closest to zero is incorrect. To determine the profitability of an investment, we need to calculate the NPV, which compares the present value of expected cash inflows and outflows.

In this case, the individual invests $10,000 in training costs and expects an earnings increase of $12,500 for the next year. Assuming this increase is solely due to the training, the net cash flow is:

Net Cash Flow = Earnings Increase - Training Costs = $12,500 - $10,000 = $2,500

To calculate the NPV, we discount this cash flow back to its present value using the 8% interest rate. The formula for present value is:

Present Value = Cash Flow / (1 + Interest Rate)^n

where n is the number of years. As the individual plans to retire the following year, n = 1.

Plugging in the values, we get:

Present Value = $2,500 / (1 + 0.08)^1 ≈ $2,314.81

The NPV is calculated by subtracting the initial investment from the present value:

NPV = Present Value - Initial Investment = $2,314.81 - $10,000 ≈ -$7,685.19

This negative NPV indicates that the investment is not profitable.

Therefore, the statement is incorrect. The NPV of this investment is significantly negative, not close to zero, highlighting the potential loss associated with the investment.