Question

HP 10bII+ Financial Calculator

a) What is the PV of receiving 2,000/year starting in 3 years going for 16 years if the discount rate is 12%?

b) What is the NPV of a project that costs $1,500,000 and generates 120,000/year forever if the discount rate is 9%?

c) A project will provide in 3 years either $8,000 with 20% probability, $13,000 with a 30% probability, $18,000 with a 40% probability, and $45,000 with a 10% probability.  Given a 6% discount rate, what is its expected PV?

Answer 1

a)

Present value at year 2 = Annuity * [ 1 - 1 / ( 1 + R)ⁿ] / R

Present value at year 2 = 2000 * [ 1 - 1 / ( 1 + 0.12)¹⁶] / 0.12

Present value at year 2 = 2000 * 6.973986

Present value at year 2 = $13,947.9723

Present value = 13,947.9723 / ( 1 + 0.12)²

Present value = $11,119.24

Keys to use in a financial calculator: PMT = 2000, N 16, I/Y 12, CPT PV

When you click PV you get 13,947.9723, then press: FV 13,947.9723, I/Y 12, N 2, CPT PV

2)

NPV = Present value of cash inflows - present value of cash outflows

NPV = ( 120,000 / 0.09) - 1,500,000

NPV = -166,666.7

3)

Cash flow in 3 years = ( 0.2 * 8000) + ( 0.3 * 13000) + ( 0.4 * 18000) + ( 0.1 * 45000)

Cash flow in 3 years = 1,600 + 3,900 + 7,200 + 4,500

Cash flow in 3 years = 17,200

Present value = 17,200 / ( 1 + 0.06)³

Present value = $14,441.45