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

Company will receive in each case = (face value*yield)*no. of days/365

365 is the no. of days in a year.

Company will receive in case 1 = ($900,000*6%)*180/365 = $54,000*180/365 = $9,720,000/365 = $26,630

Company will receive in case 2 = ($900,000*11%)*90/365 = $99,000*90/365 = $8,910,000/365 = $24,411

case 1 will be the best investment because company will receive $26,630 in case 1 which is higher than case 2's receipt of $24,411.

No, Company should not take the project with 5-year period because project's NPV is negative. negative NPV indicates that project will generate losses.