Question

A Company is considering two different commercial bills. One is at 6 per cent yield including fees for 180 days for a face value of $900 000. The other is at 11 per cent yield for 90 days for a face value of $900 000. How much will the company receive in each case? Show workings and comment on which would be the best investment.   

What would you recommend if instead the company could undertake a project instead with this $900 000 with an ARR of 12% and a NPV of (-12 977) for a five year period.

Answer 1

Income recieved by the company in each case

formula = face value * yeild*(no of days/ 365)

case 1 -180 days

= 900,000*6%*180/365

Income recieved = 26,630

case 2 -90 days

= 900,000*11%*90/365

Income recieved = 24,411

if we consider the income of both option, case1 will be the best investment.

if we consider the investment on the basis of return of investment, investment in case 2 is having 11% which is more than the other one. so this is also acceptable under this view.

if instead the company could undertake a project instead with this $900 000 with an ARR of 12% and a NPV of (-12 977) for a five year period.

The project is not acceptable because of having a -ve NPV, which means the company will suffer net loss.