Question

An investment that requires $1500 initial investment will return $625 at the end of first year,...

An investment that requires $1500 initial investment will return $625 at the end of first year, $675 at the end of second year, and $725 at the end of third year. Assume the discount rate is continuously compounded at 12%. What is the Net Present Value of the investment?

1.

The Net Present Value of the investment is 88.50 to 89.50
2.

The Net Present Value of the investment is 90.50 to 91.50
3.

The Net Present Value of the investment is 92.50 to 93.50
4.

The Net Present Value of the investment is 89.50 to 90.50
5.

The Net Present Value of the investment is 91.50 92.50
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The cash flow of the investment is shown as below:

Year 0 1 2 3
Cahflow -1500 625 675 725

Rate of interest = r = 12%

The present value when the rate is continuously compounded is calculates using the formula:

PV = FV*e-rt

NPV is the present value of all future cashflows

The cashflows are:

C0 = -1500, C1 = 625, C2 = 675, C3 = 725

NPV = C0 + C1*e-r + C2*e-2r + C3*e-3r

NPV = -1500 + 625*e-0.12 + 675*e-0.24 + 725*e-0.36 = -1500 + 554.325272948223 + 530.973806219924 + 505.815336401498 = 91.1144155696449

Year 0 1 2 3
Cahflow -1500 625 675 725
Present value -1500 554.3253 530.9738 505.8153

Therefore, NPV = 91.11 (Rounded to two decimal places)

Correct Answer

2. The Net Present Value of the investment is 90.50 to 91.50

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
An investment that requires $1,000 initial investment will return $600 at the end of the first...
An investment that requires $1,000 initial investment will return $600 at the end of the first year and $650 at the end of second year. Assume the discount rate is continuously compounded at 8%. What is the Net Present Value of the investment? Please show work step by step.
(1)A firm undertakes a five-year project that requires an initial capital investment of $100,000. The project...
(1)A firm undertakes a five-year project that requires an initial capital investment of $100,000. The project is then expected to provide cash flow of $12,000 per year for the first two years, $50,000 in the third and fourth years, and $10,000 in the fifth year. The project has an end-of-life salvage value of $5,000. If the discount rate applied to these cash flows is 9.50 percent, to the nearest dollar, the net present value of this project is _____? (2)The...
. An investment requires an initial disbursement of € 2,500,000 and the duration of the project...
. An investment requires an initial disbursement of € 2,500,000 and the duration of the project is 3 years, in the first of which it generates a cash flow of € 1,500,000, in the second € 3,700,000 and the third € 4,100,000. Calculate the Net Present Value of the investment, knowing that inflation is 3% cumulative annually and that the required profitability in the absence of inflation is 8%. Calculate the actual internal rate of return of the previous investment.
What is the net present value of a project that requires a $2,000 investment today and...
What is the net present value of a project that requires a $2,000 investment today and returns $800 at the end of the first year and $1,700 at the end of the second year? Assume a discount rate of 10%
A firm is considering investing in a project that requires an initial investment of $200,000 and...
A firm is considering investing in a project that requires an initial investment of $200,000 and is expected to produce cash inflows of $60,000, $80,000, and $100,000 in first, second, and third years. There will be no residual value. The firm applies a discount rate of 10%. Discount factors for Year 1, 2 and 3 are 0.909, 0.826, and 0.751 respectively. Required: i) Calculate the NPV of the project. ii) Explain the meaning of NPV and its advantages as an...
A firm is considering investing in a project that requires an initial investment of $200,000 and...
A firm is considering investing in a project that requires an initial investment of $200,000 and is expected to produce cash inflows of $60,000, $80,000, and $100,000 in first, second, and third years. There will be no residual value. The firm applies a discount rate of 10%. Discount factors for Year 1, 2 and 3 are 0.909, 0.826, and 0.751 respectively. Required: i) Calculate the NPV of the project. ii) Explain the meaning of NPV and its advantages as an...
What will be the net present value of a project that provides net cash flow of...
What will be the net present value of a project that provides net cash flow of $20,000 at the end of the first year, $7,000 at the end of the second year, and $13,000 at the end of the third year? The initial cost is $8,000 and the appropriate discount rate is 10%. Tophill Corporation is considering a project that will pay $10,000 at the end of the first year, $22,000 at the end of the second year, and $40,000...
A project requires an initial investment of $1,500,000 and will return $420,000 each year for six...
A project requires an initial investment of $1,500,000 and will return $420,000 each year for six years. Factors: Present Value of an Annuity (r = 10%) Year 1 0.9091 Year 2 1.7355 Year 3 2.4869 Year 4 3.1699 Year 5 3.7908 Year 6 4.3553 Use this data to answer questions 15 and 16: If taxes are ignored and the required rate of return is 10%, what is the project's net present value (rounded to the nearest dollar)? (5pts) a. $1,262,910...
The company has a project with a 5-year life that requires an initial investment of $210,000,...
The company has a project with a 5-year life that requires an initial investment of $210,000, and is expected to yield annual cash flows of $59,500. What is the net present value of the project if the required rate of return is set at 8%? Net Present Value= ($59,500*???)-210,000 What NPV does the previous calculation yield?  $Note: Round your answer to the nearest whole dollar.
An investment project that requires immediate costs of $200 generates revenues of $242 at the end...
An investment project that requires immediate costs of $200 generates revenues of $242 at the end of the first year. What is its annual internal rate of return … (a) if the interest is compounded annually? i1 = ______________% (b) if the interest is compounded twice a year? i2 = _______________% (c) if the interest is compounded continuously? r = ln(______________) B. Company’s share costs $100. In one next year it will pay a dividend of $10. The dividend will...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT