Question

Question 7: 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

the best investment would be the one which generates higher dollar return. the dollar return will be the amount company will receive in each case.

Case 1

amount company will receive = (face value*yield)*no. of days/365

there are 365 days in a year.

amount company will receive = ($900,000*6%)*180/365 = $54,000*180/365 = $9,720,000/365 = $26,630

Case 2

amount company will receive = ($900,000*11%)*90/365 = $99,000*90/365 = $8,910,000/365 = $24,411

the best investment would be case 1 because it has higher dollar return of $26,630 than case 2's dollar return of $24,411. case 1 has higher dollar return because its holding period is double that of case 2.

you would recommend to not undertake a project of 5-year period because it has negative NPV. negative NPV means project will incur losses and company will loose money in this project.