Question

could somebody please check if my answer is correct. Thanks

the firm would like to invest $1,000,000 with the following projected cash flow streams:

Year 1: -$100,000
Year 2: -$100,000
Year 3: $100,000
Year 4: $300,000
Year 5: $1,000,000

What is the Net present value of the project at a 5% discount rate?

Answer 1

PV1 = -100,000(1.05)^-1 = -95,238
PV2 = -100,000(1.05)^-2 = -90,702
PV3 = 100,000(1.05)^-3 = 86,383
PV4 = 300,000(1.05)^-4 = 246,810
PV5 = 1,000,000(1.05)^-5 = 783,526

Answer 2

The NPV = 930,779

Answer 3

@dumbcow

Answer 4

@ganeshie8

Answer 5

@cwrw238

Answer 6

@Hero

Answer 7

can u tell me why you are multiplying the net cash flow with powers of 1/1.05 instead of multipying it with powers of 0.95?

Answer 8

alright

Answer 9

i used the formula PV = FV/(1+R)^n

Answer 10

the discount rate is 5% = 0.05

Answer 11

have a made a mistake?

Answer 12

i*

Answer 13

do you have another way of doing it @atlas ???

Answer 14

no chad you are right

Answer 15

are you completely 100% sure that my answer is correct?

Answer 16

yes if your calculations are right

Answer 17

are you familiar with these sorts of questions because i still have one to go. i hope you can help me

Answer 18

do you have time?

Answer 19

i read these sometime back chad......i hope i can help

Answer 20

give me a sec so that i can copy and paste it

Answer 21

Which bond to invest in:

Bond A has a Face Value of $500,000, life of 4 years, coupon rate of 6% p.a. And a yield return of 5% p.a.

Bond B has a Face Value of $100,000, life of 5 years, coupon rate of 7% p.a. And a yield return of 6% p.a

Answer 22

how can we find which bond is better than the other and what formula are we supposed to use?

Answer 23

instead of concentrating on formula - find the future value of BOND A and BOND B after 20 years (LCM of 4 and 5)

Answer 24

c= FV x Coupon Rate
c= 500,000 x 0.06 = 30,000

Answer 25

am i right @atlas

Answer 26

???

Answer 27

u are right but that is just the coupon rate
you have to calculate the fv using yield too

Answer 28

see this part i partially know

Answer 29

should it be 30,000(1.05)^-1 + 30,000(1.05)^-2 + ...

Answer 30

30,000(1.05)^-1 + 30,000(1.05)^-2 + 30,000(1.05)^-3 + 30,000(1.05)^-4 + 500,000(1.05)^-4 ???

Answer 31

is it correct?

Answer 32

yeah right for BOND A

Answer 33

this is present value of BOND A

Answer 34

now once i find the NPV OF Bond A i compare it with the NVP of Bond B? How will i know which one is better than the other?

Answer 35

is it the one with the greater NPV?

Answer 36

no

Answer 37

you have to find how much return you get for per dollar invested

Answer 38

Calculate NPV/(invested amount) for BOND A and Bond B
Whichever is greater

Answer 39

can i do the first part (the one that i now understand) and then you can guide me through it

Answer 40

sure

Answer 41

thanks @atlas

Answer 42

For instance: if Bond A has a Face Value of $700,000, life of 6 years, coupon rate of 6% p.a. And a yield return of 7% p.a. it will look like this