Finance 1. What is the present value of $800 to be received at the end of eight
ID: 2654081 • Letter: F
Question
Finance
1. What is the present value of $800 to be received at the end of eight years, assuming the following annual interest rate?
a. 4 percent, discounted annually
b. 8 percent, discounted annually
c. 20 percent, discounted quarterly
d. 0 percent
2. BASIC 13. Two investment opportunities are open to you: Investment 1 and Investment 2. Each has an initial cost of $10,000. Assuming that you desire a 10 percent return on your initial investment, compute the net present value of the two alternatives and evaluate their relative attractiveness:
Investment 1 Investment 2 Cash Flows Year Cash Flows Year 5,000 1 8,000 1 6,000 2 7,000 2 7,000 3 6,000 3 8,000 4 5,000 4Explanation / Answer
Answer:
1
Calculation of Present value
Future Value
Discount rate
Periods
Formula
Present value
F
r
n
F / (1+r)^n
a
$ 800.00
0.04
8
800/ (1+0.04)^8
$ 584.55
b
$ 800.00
0.08
8
800/ (1+0.08)^8
$ 432.22
c
$ 800.00
0.05
32
800/ (1+0.05)^32
$ 167.89
(0.20/4 Quarterly)
(8 years * 4 Quarters )
d
$ 800.00
0
8
800/ (1+0.00)^8
$ 800.00
2
Calculation of NPV
Investment 1
Year
Cash Flows (CF)
PVF (10%)
PV = CF *PVF
0
$ (10,000.00)
1.00000
$ (10,000.00)
1
$ 5,000.00
0.90909
$ 4,545.45
2
$ 6,000.00
0.82645
$ 4,958.68
3
$ 7,000.00
0.75131
$ 5,259.20
4
$ 8,000.00
0.68301
$ 5,464.11
NPV = Sum of PVs
$ 10,227.44
Investment 2
Year
Cash Flows (CF)
PVF (10%)
PV = CF *PVF
0
$ (10,000.00)
1.00000
$ (10,000.00)
1
$ 8,000.00
0.90909
$ 7,272.73
2
$ 7,000.00
0.82645
$ 5,785.12
3
$ 6,000.00
0.75131
$ 4,507.89
4
$ 5,000.00
0.68301
$ 3,415.07
NPV = Sum of PVs
$ 10,980.81
Evaluation :
Investment 2 has higher NPV, hence its is better.
1
Calculation of Present value
Future Value
Discount rate
Periods
Formula
Present value
F
r
n
F / (1+r)^n
a
$ 800.00
0.04
8
800/ (1+0.04)^8
$ 584.55
b
$ 800.00
0.08
8
800/ (1+0.08)^8
$ 432.22
c
$ 800.00
0.05
32
800/ (1+0.05)^32
$ 167.89
(0.20/4 Quarterly)
(8 years * 4 Quarters )
d
$ 800.00
0
8
800/ (1+0.00)^8
$ 800.00
2
Calculation of NPV
Investment 1
Year
Cash Flows (CF)
PVF (10%)
PV = CF *PVF
0
$ (10,000.00)
1.00000
$ (10,000.00)
1
$ 5,000.00
0.90909
$ 4,545.45
2
$ 6,000.00
0.82645
$ 4,958.68
3
$ 7,000.00
0.75131
$ 5,259.20
4
$ 8,000.00
0.68301
$ 5,464.11
NPV = Sum of PVs
$ 10,227.44
Investment 2
Year
Cash Flows (CF)
PVF (10%)
PV = CF *PVF
0
$ (10,000.00)
1.00000
$ (10,000.00)
1
$ 8,000.00
0.90909
$ 7,272.73
2
$ 7,000.00
0.82645
$ 5,785.12
3
$ 6,000.00
0.75131
$ 4,507.89
4
$ 5,000.00
0.68301
$ 3,415.07
NPV = Sum of PVs
$ 10,980.81
Evaluation :
Investment 2 has higher NPV, hence its is better.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.