Premium Essay

Submitted By plifebryan

Words 681

Pages 3

Words 681

Pages 3

1. What is the future value of $10,000 on deposit for five years at 6% simple interest? A) $7,472.58 B) $10,303.62 C) $13,000.00 D) $13,382.26 Answer: C Difficulty: Medium Page: 59, 6th paragraph.

FV = PV + (PV x r x t) (10,000) + ((10,000 x .06) x 5) = $13,000.00 2. How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for three years? A) $107.69 B) $133.10 C) $134.49 D) $313.84 Answer: C Difficulty: Medium Page: 61, Table 3.2. FV = PV (1+r)t 100 (1.025)12 = 134.49 3. How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 9% interest compounded annually for 40 years? A) $ 87,200.00 B) $675,764.89 C) $736,583.73 D) $802,876.27 Answer: B Difficulty: Medium Page: 83, Table 3.5.

PV = 2000

= 2000 x 337.8824 =$675,764.89

4. Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount? A) $ 952 B) $1,600 C) $1,728 D) $3,973 Answer: D Difficulty: Medium Page: 61, Table 3.2. $20,000 = x(1.08)21 $20,000 = 5.0338x $3,973.12 = x

5. What is the present value of your trust fund if it promises to pay you $50,000 on your 30th birthday (7 years from today) and earns 10% compounded annually? A) $25,000.00 B) $25,657.91 C) $28,223.70 D) $29,411.76 Answer: B Difficulty: Medium Page: 91, 5th paragraph. PV = = = $25,657.91 6. What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the end of year 1, $2,000…...

Premium Essay

...The NPV and IRR methods would in certain situations give the same accept-reject decision. But they may differ in the sense that the choice of an asset under certain circumstances may be mutually contradictory. The two methods would give consistent results in terms of acceptance or rejection of investment proposals in certain situations such as conventional investments or independent proposals. A conventional investment is one in which the cash flow pattern is such that an initial investment is followed by a series of cash inflows. Thus, in the case of such investments, cash outflows are confined to the initial period. The independent proposals refer to investments the acceptance of which does not preclude the acceptance of others so that all profitable proposals can be accepted and there are no constraints in accepting all profitable projects. However, in certain situations they will give contradictory results. This is so in the case of mutually exclusive investment projects. The examples of such projects are technical exclusiveness and financial exclusiveness. The term technical exclusiveness refers to alternatives having different profitabilities and the selection of that alternative which is the most profitable. Thus, in the case of a purchase or lease decision the more profitable out of the two will be selected. The mutual exclusiveness may also be financial. If there are resource constraints, a firm will be forced to select that project which is the most profitable......

Words: 317 - Pages: 2

Premium Essay

...-75,000 95,000 -38,000 57,000 6,33,000 359181.1997 -520000 -7,20,000 16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 73,000 16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 73,000 51959.95809 16000 15,00,000 -13,00,000 2,00,000 -30,000 -75,000 95,000 -38,000 57,000 73,000 46392.81972 -7,20,000 -7,20,000 -1,39,092 73,000 65178.57143 58195.15306 Internal Rate of Return NPV @ 5% NPV Year 0 -7,20,000 34,826 Taking IRR at 5% and 12% IRR Traditional Formula = LR + { NPV @ LR/NPV @ LR - NPV @ HR} X (HR-LR) IRR 0.064017186 6.401718635 Year 1 Year 2 69523.80952 66213.15193 Year 3 63060.14469 Year 4 60057.28066 Year 5 495972.0634 Therefore Internal Rate of Return for this Project is 6.69600 A) Payback Period Year 0 1 2 3 4 5 Future Cash Flows -7,20,000 73,000 73,000 73,000 73,000 6,33,000 PV of FCF Accumulated NPV on FCF 65178.57143 58195.15306 51959.95809 46392.81972 359181.1997 -6,54,821 -5,96,626 -5,44,666 -4,98,273 -1,39,092 Pay back Period Cannot be caluculated as it is taking more than 5 years to beak even Profitability Index: PI = PVCF/ Intial Investment Present Value Initial Investment 580907.7 7,20,000 Profitability Index 0.806816 Fact File: Machine A Machine B SP 2,00,000 3,00,000 12 50,000 60,000 40,000 60,000 Year 0 Investing Activities Initial Investment Depreciation Tax Salavage value......

Words: 578 - Pages: 3

Premium Essay

...Adjusted present value Wadia Haddaji February 20, 2008 • Topics: 1. Adjusted present value. • Readings: 1. Brealey, Myers and Allen, section 20.4. 1 The Adjusted-Present-Value Rule • Recall that we can write the value of a levered ﬁrm as the value of an otherwise identical all-equity ﬁrm and the value of its ﬁnancing decisions: V = VU +NPV(ﬁnancing decisions). • It is then obvious to deﬁne the APV of a project as the sum of its NPV to an all-equity ﬁrm and the PV of the associated ﬁnancing decisions: APV = NPV(unlevered project) + NPV(ﬁnancing decisions) • Separating the APV of a project into its NPV to an all-equity ﬁrm and the value of the associated ﬁnancing decisions should be generally useful for the ﬁnancial manager. 2 A Comparison of WACC and APV • Features/advantages of WACC. 1. WACC accounts for tax shield beneﬁt of interest in discount rate. 2. WACC is widely adopted by practitioners and is easy to use. 3. WACC is applicable when D/E remains essentially constant through project life. 4. WACC is most appropriate when the project is “typical” of the ﬁrms traditional businesses (i.e., same risk), or “scale enhancing”. • Features/advantages of APV. 1. APV accounts for tax shield beneﬁt of interest in cash ﬂows (not discount rate). 2. APV was introduced by academics and is slowly being adopted in practice. 3. 11% of ﬁrms always or almost always use it. • APV often requires/accomodates knowledge of a particular debt repayment schedule. • APV (as opposed...

Words: 2208 - Pages: 9

Premium Essay

...Comparing Net Present Value and Internal Rate of Return by Harold Bierman, Jr Executive Summary • • • Net present value (NPV) and internal rate of return (IRR) are two very practical discounted cash flow (DCF) calculations used for making capital budgeting decisions. NPV and IRR lead to the same decisions with investments that are independent. With mutually exclusive investments, the NPV method is easier to use and more reliable. Introduction To this point neither of the two discounted cash flow procedures for evaluating an investment is obviously incorrect. In many situations, the internal rate of return (IRR) procedure will lead to the same decision as the net present value (NPV) procedure, but there are also times when the IRR may lead to different decisions from those obtained by using the net present value procedure. When the two methods lead to different decisions, the net present value method tends to give better decisions. It is sometimes possible to use the IRR method in such a way that it gives the same results as the NPV method. For this to occur, it is necessary that the rate of discount at which it is appropriate to discount future cash proceeds be the same for all future years. If the appropriate rate of interest varies from year to year, then the two procedures may not give identical answers. It is easy to use the NPV method correctly. It is much more difficult to use the IRR method correctly. Accept or Reject Decisions Frequently, the investment......

Words: 2310 - Pages: 10

Premium Essay

...Capital Budgeting Net Present Value Theoretical Background The capital budgeting decision is basically based on a cost-to-benefit analysis (Chatfield & Dalbor, 2005). The cost of the project is the net investment and the benefits of the project are the net cash flows. Comparison of these constituents ultimately leads to project acceptance or rejection. As suggested by Bester (nd.), there are many advantages to using net present value as a capital budgeting evaluation technique. Some being as follows: * Incorporates the risk involved with a specific project. * Will depict the potential increase in firm value (i.e. the increase in shareholder wealth). * The time value of money is taken into account. * All expected cash flows are taken into account. * The method is relatively straightforward and simple to calculate. However this method does come with disadvantages. For example (Bester, nd.): * Outcomes are depicted in Rand values and not percentages, thus relative comparison may prove difficult. * NPV requires a predetermined discount rate (cost of capital) which may be difficult to calculate. “Academics have long promoted the use of NPV” (Correia & Cramer, 2008, pg 33). Net Present Value (NPV) is one of the most straight-forward and common valuation methods in capital budgeting. Stated simply, NPV can be defined as a “project’s net contribution to wealth” (Brealey, Myers & Allen, 2008, pg 998), and could also be observed as “an......

Words: 1807 - Pages: 8

Premium Essay

...inspecting the cash flows, NPV method, IRR method, Payback period method and PI method are three most popularly used quantitative methods to do capital-budgeting analysis. Among the three methods, NPV is better than the other two methods in most situations. 1. Definition 2. Calculation results under different methods Using the mentioned 4 methods and Excel, the following calculating result can be achieved. Project | 1 | 2 | 3 | 4 | 5 | NPV | 73.09 | -85.45 | 793.92 | 228.22 | 129.70 | IRR | 10.87% | 6.31% | 11.33% | 0.1233 | 11.12% | Payback Period | 7 | 2 | 15 | 6 | 8 | Discounted Payback Period | 8 | 3 | 15 | 10 | 14 | PI | 1.04 | 0.97 | 1.20 | 1.11 | 1.06 | Project | 6 | 7 | 8 | Incremental index for 7-8 | NPV | 0.00 | 165.04 | 182.98 | -17.94 | IRR | 10.00% | 15.26% | 11.41% | 10.18% | Payback Period | 1 | 2 | 7 | - | Discounted Payback Period | 1 | 3 | 7 | - | PI | 1.00 | 1.08 | 1.09 | -0.01 | Consider that Project 7 and 8 are mutually exclusive, by calculating the incremental NPV, IRR and PI index, and we can find that project 8 should be chosen over project 7 in all the 3 methods. Thus, the ranking results under different methods can be achieved: NPV | 3 | 4 | 8 | 5 | IRR | 4 | 8 | 3 | 5 | Payback Period | 6 | 2 | 7 | 1 | Discounted Payback Period | 6 | 2 | 7 | 1 | PI | 3 | 4 | 8 | 5 | In payback and discounted payback period methods, project 2 and project 7 actually have the same ranking. NPV and PI methods have......

Words: 645 - Pages: 3

Premium Essay

...When cash inflows are even: |NPV = R × |1 − (1 + i)-n |− Initial Investment | | |i | | In the above formula, R is the net cash inflow expected to be received each period; i is the required rate of return per period; n are the number of periods during which the project is expected to operate and generate cash inflows. When cash inflows are uneven: NPV = | |R1 |+ |R2 |+ |R3 |+ ... | |− Initial Investment | | | |(1 + i)1 | |(1 + i)2 | |(1 + i)3 | | | | |Where, i is the target rate of return per period; R1 is the net cash inflow during the first period; R2 is the net cash inflow during the second period; R3 is the net cash inflow during the third period, and so on ... Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms, [pic] where [pic] – the time of the cash flow [pic] – the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.); the opportunity cost of capital [pic] – the net cash flow i.e. cash inflow – cash outflow, at time t . For educational purposes, [pic] is commonly placed to the left of the sum to emphasize its role as (minus) the investment. The result of this formula is multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay the present value but in cases where the cash......

Words: 363 - Pages: 2

Premium Essay

...free encyclopedia Jump to: navigation, search In finance, the net present value (NPV) or net present worth (NPW)[1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity. In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting and widely used throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, above the cost of funds. NPV can be described as the “difference amount” between the sums of discounted: cash inflows and cash outflows. It compares the present value of money today to the present value of money in the future, taking inflation and returns into account The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse process in DCF analysis — taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which would yield the given price as NPV) — is called the yield and is more widely used in bond......

Words: 3175 - Pages: 13

Premium Essay

...Present Value: Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. NPV is calculated using the following formula: NPV= -C0 + C11+r+ C21+r2+…+ Ct(1+r)t - C0 = initial investment C = cash flow r = discount rate t = time If the NPV of a prospective project is positive, the project should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative. Example of Net Present Value To provide an example of Net Present Value, consider a company who is determining whether they should invest in a new project. The company will expect to invest $500,000 for the development of their new product. The company estimates that the first year cash flow will be $200,000 the second year cash flow will be $300,000, and the third year cash flow to be $200,000. The expected return of 10% is used as the discount rate. The following table provides each year's cash flow and the present value of each cash flow. Year | Cash Flow | Present Value = FV(1+r)t | 0 | - 500,000.00 | -500000/(1.10)^0 = -500000.00 | 1 | 200,000.00 | 200000/(1.10)^1 = 181,818.18 | 2 | 300,000.00 | 300000/(1.10)^2 = 247,933.88 | 3 | 200,000.00 | 200000/(1.10)^3 = 150,262.96 | NPV = -500000.00 +......

Words: 919 - Pages: 4

Premium Essay

...Contents 1. Assignment Part A Prepare the case, with recommendations to be presented to the Board of Directors of ProGen. Assess the viability of the project using the NPV, IRR, and Payback methods. 2. Assignment Part B “The IRR rule is redundant as an investment criterion because the NPV rule always dominates. Discuss this statement giving examples where possible. 3. Conclusion “The IRR rule is redundant as an investment criterion because the net present value (NPV) rule always dominates it.” 4. Bibliography References Assignment Part A This report evaluates the viability for marketing and distribution of genetically engineered soya seeds developed by a biotechnology firm. The firm will supply seeds and permit ProGen to market and distribute them under a licence. The evaluation methods used for this proposal are net present value (NPV), internal rate of return (IRR), and Payback methods. Assumptions used for this analysis are summarised below • Marketing cost is assumed to be a sunk cost and therefore not included in the calculation • Cash flow will be considered over 5 years as this is the lifecycle of the product • An annual licence fee included at 1M per annum • Capital investment for vehicles £650k is an upfront payment and therefore not discounted • Year 5 will see a cash inflow of 120K assumed a realistic......

Words: 2195 - Pages: 9

Premium Essay

...* Payback Method * Capital Allowance – required to do the assignment * Broad idea of assignment Part A : understanding the method Part B : theoretical method NO TAX requirement ! Valuation method .. NPV, IRR , Payback method. NPV – A rule that company use whether accept or reject the project. Based on discount factor , interest rate. Study guide! – NPV (number of calculation, examples) IRR – a discount rate that gives a zero NPV… cash flow tend to zero. NPV you know initial initial investment , cash flow, discount rate IRR you know initial initial investment , cash flow, but predict your discount rate You cant rely excel ! (don’t use the functioin) Pay back method : how long it takes your initial investment … ? 2 years etc Pay back period --- every company can decide their payback period. Whether they accept and reject the project. Two companies in the same sector.. they may have two payback period. Evaluation method.. accounting measure. NPV rule : accept investment project which cash flow worth more than the cost of financing the projects. IRR rule : accept the project if IRR Is greater than the cost of capital. If your IRR higher than discount rate , accept the project. Pay back : payback period is less than specified payback period. | If se NPV .. you should accept the project..and IRR rule.. but payback period not really.. it depends to the company Depreciation vs capital allowance. (not related to assignment) Depreciation: using the asset,......

Words: 854 - Pages: 4

Premium Essay

...cost of capital is 10%. The expected cash flow are as follows: Year | Machine A(Rs. Lakh) | Machine B(Rs. Lakh) | 1 | 5 | 10 | 2 | 10 | 15 | 3 | 20 | 16 | 4 | 15 | 20 | 5 | 15 | 15 | Cost of Machine A: 25 lakh Cost of Machine B: 30Lakh Hearing the problem I remembered that this type of problem I had studied in capital budgeting, and I asked him to relax and meet me tomorrow @ 6:00pm. SOLUTION: 1. NPV METHOD: Year | Cash Flow( Rs. In Lakh) | PVF @ 10% | Total Present Value(Rs. In Lakh) | | Machine A | Machine B | | Machine A | Machine B | 1 | 5 | 10 | .91 | 4.55 | 9.1 | 2 | 10 | 15 | .83 | 8.3 | 12.45 | 3 | 20 | 16 | .75 | 15 | 12.0 | 4 | 15 | 20 | .68 | 10.2 | 13.6 | 5 | 15 | 15 | .62 | 9.3 | 9.3 | | TOTAL PV | 47.35 | 56.45 | | Less cash outflow | 25 | 30 | | NPV(NET PRESENT VALUE) | 22.35 | 26.45 | 2. PROFITABILITY INDEX : Present value of cash Inflow ÷ Present value of cash out flow Machine A: 47.35÷ 25 = 1.894 Machine B: 56.45 ÷ 30 = 1.881 Recommendation: | Machine A | Machine B | Choice | NPV | 22.35 | 26.45 | B | Profitability index | 1.894 | 1.881 | A | Finally I suggested him to go with MACHINE B. But he said that the profitability of A is more than B, at that time I recalled the example my teacher told me that at the end what do you want more cash in your drawer or profitability. And finally he got convinced and happy to get the solution, and gave me a nice party....

Words: 498 - Pages: 2

Premium Essay

...Acct 2200 NPV Assignment 04-18-2016 Student: Emari Thomas ___________________________________________________________________________ 1. Suture Corporation's discount rate is 12%. If Suture has a 5-year investment project that has a project profitability index of zero, this means that: A. the net present value of the project is equal to zero. B. the internal rate of return of the project is equal to the discount rate. C. the payback period of the project is equal to the project's useful life. D. both A and B above are true. 2. If the net present value of a project is zero based on a discount rate of 16%, then the internal rate of return is: A. equal to 16%. B. less than 16%. C. greater than 16%. D. cannot be determined from this data. 3. Heap Company is considering an investment in a project that will have a two year life. The project will provide a 10% internal rate of return, and is expected to have a $40,000 cash inflow the first year and a $50,000 cash inflow in the second year. What investment is required in the project? A. $74,340 B. $77,660 C. $81,810 D. $90,000 Year 1=40000*.3909=36360 Year 2=50000*.826=41300 Total 77660 4. Congener Beverage Corporation is considering an investment in a capital budgeting project that has an internal rate of return of 20%. The only cash outflow for this project is the initial investment. The project is estimated to have an 8 year life and no salvage value. Cash inflows from this project are expected to......

Words: 484 - Pages: 2

Premium Essay

...Less Initial Investment 125.000 NPV 23.298 NPV @ 12% = £23, 298 Project B: £000 Year NCF 1 43 2 43 3 43 4 43 5 43 Discount Factor 12% PV 0.893 38.399 0.797 34.271 0.712 30.616 0.636 27.348 0.567 24.381 Total PV 155.015 Less Initial Investment 125.000 NPV 30.015 NPV @ 12% = £30,015 Yes, they should be accepted because both projects have a positive NPV, therefore it indicates the increase in the market value of the shareholder’s funds. For both projects the company will recover the initial outlay and earn a return greater than 12% per year on the investment. 4 Question E According to Colin Drury, the most straightforward way of determining whether a project yields a return in excess of the alternative equal risk investment in traded securities is to calculate the net present value (NPV). This is the present value of the net cash inflows less the project’s initial investment outlay. If the rate of return from the project is greater than the return from an equivalent risk investment in securities traded in the financial market, the NPV will be positive. Alternatively, if the rate of return is lower, the NPV will be negative. A positive NPV therefore indicates that an investment should be accepted, while a negative value indicates that it should be rejected. A zero NPV calculation indicates that the firm should be indifferent to whether the project is accepted or rejected. Question F 1) If the cost of capital increases, the NPV would be reduced and......

Words: 1395 - Pages: 6

Premium Essay

...1.NPV NPV(Net Present Value), is the present value of a project's cash flow minus the present value of its cost, it means that how much the project could create to shareholders' wealth, the more the NPV, the more value the project makes and the higher the stock's price. If NPV equal to zero means the cash flow which the project makes can compensate for the cost of investment, the rate of return equal to required rate of return. If NPV exceeds zero, the part of exceeded belongs to shareholders. Accept the project which has a positive NPV will create positive economic value added and market value added. In this case, it can be seen clearly from Table 1, SSW and CCS both has a positive NPV, they all create value and wealth for the company. What should be mentioned is that, the NPV of SSW is higher than CCS, it means SSW could add more value than CCS. Table 1. the NPVs of SSW and CCS SSW CCS NPV 240,796.39 226,897.07 2.IRR IRR(Internal Rate of Return ) is the discount rate that make the inflows to equal the initial cost, in other word, it makes NPV to equal to zero. IRR is an estimate of expected project's rate of return. If this return exceed the cost of the capital used to the project, the part of difference is a dividend to shareholders and causes the stock's price to rise. If the IRR is less than cost of capital , shareholders have to make up. In this case, the cost of capital of these two restaurants both equal to 10%, the Table 2 shows that the IRR of SSW is......

Words: 1227 - Pages: 5