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wolverine [178]
3 years ago
6

Norman Co. wants to purchase a machine for $40,000, but needs to earn an 8% return. The expected year-end net cash flows are $12

,000 in each of the first three years, and $16,000 in the fourth year. What is the machine's net present value (round to the nearest whole dollar)?
Business
1 answer:
umka21 [38]3 years ago
7 0

Answer:

Year      Cashflow    [email protected]%           PV                    

                   $                                  $                                                                                                                    

0                (40,000)     1              (40,000)                                                                                                                                                                                                    

1                   12,000      0.9259      11,111      

2                  12,000      0.8573       10,288

3                  12,000      0.7938        9,526                                                                                                                                    

4                  16,000      0.7350        <u>11,760</u>

                                             NPV   <u> 2,685</u>

<u />

Explanation:

Net present value is the difference between present value of cash inflows and initial outlay. The present value of cash inflows were obtained by multiplying the cash inflows by discount factors.                                                                                                                                                                                                                                                            The discount factors were calculated  using the formula (1 + r)-n,  where n represents number of years and r denotes discount rate.                                      

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Answer:

This means that receiving 9000 today is better for us as we will have more at the end of 6 years.

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We need to first calculate what is the future value of payments in both scenarios. If we receive $9,000 today and invest it at 10% for 6 years we will have 9000*1.10^6=15,944

If we start reviving cash in 4 annual payments 2 years from now of $3000 we will have to find the future value of each individual payment and add them up.

First payment Future value = 3000*1.10^4=4392 (Money can be invested for 4 years at 10%)

Second payment future value = 3000*1.10^3=3993 (Money can be invested for 3 years at 10%)

Third payment future value = 3000*1.10^2=3630 (Money can be invested for 4 years at 10%)

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This means that receiving 9000 today is better for us as we will have more at the end of 6 years.

5 0
3 years ago
Suppose that an investor with a 10-year investment horizon is considering purchasing a 20-year 8% coupon bond selling for $900.
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Answer:

8.67%

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Future value of reinvested coupons = FV(40, 20, 3.5%)

Future value of reinvested coupons = $1,131.19

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PMT (Semi-annual coupons) = 40

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Rate (Semi-annual YTM) = 9%/2 = 4.5%

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Price of the bond after 10 years = PV(1000, 40, 20, 4.5%)

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Total Annual Return = [($2,066.15/$900)^(1/10)] -1

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Total Annual Return = 1.08665561792 - 1

Total Annual Return = 0.08665561792

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