Use present worth analysis to determine whether the following proposal seems to
ID: 1148594 • Letter: U
Question
Use present worth analysis to determine whether the following proposal seems to be justified, if an annual rate of return of 16%, compounded semi-annually, is desired:
Investments would be $50,000 on January 1, 1995 and $70,000 on July 1, 1995. Income would be quite irregular, starting at $10,000 each six months beginning January 1, 1996 until, and including, January 1, 1998. There would be no income after that until July 1, 1999, when $35,000 would be received. Then, there would be income of $25,000 on January 1, 2000; $50,000 on July 1, 2000; and $25,000 on January 1, 2001. a) 78,347 b) 92,090 c) -17,385 d) -439 (almost zero)
Explanation / Answer
Option C is correct
The table below schedules the cash flow for each half year. The income is received every half year and interest rate is also compounded every half year so we take R = 16%/2 = 8%. The present value factor is (1+R)^(-N). The net present value is turned out to be c) -17,385
N(a half year) Present value P/F = (1+R%)^-N Half years 0 -50000 -50000.00 1.0000 Jan-95 1 -70000 -64814.81 0.9259 Jul-95 2 10000 8573.39 0.8573 Jan-96 3 10000 7938.32 0.7938 Jul-96 4 10000 7350.30 0.7350 Jan-97 5 10000 6805.83 0.6806 Jul-97 6 10000 6301.70 0.6302 Jan-98 7 0 0.00 0.5835 Jul-98 8 0 0.00 0.5403 Jan-99 9 35000 17508.71 0.5002 Jul-99 10 25000 11579.84 0.4632 Jan-00 11 50000 21444.14 0.4289 Jul-00 12 25000 9927.84 0.3971 Jan-01 NPV -17384.7394Related Questions
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