Question

1. A firm is evaluating a project with an initial cost of $ 897,803 and annual cash inflows of $ 214,554 per year (first cash flow to be received exactly one year from today) for each of the next 5 years. If the cost of capital for this project is 10 %, what is this project's NPV?

2. If the returns on Stock A are as follows: Year 1 return = 1 %, Year 2 return = -10 %, Year 3 return = -7 %, Year 4 return = -18 %, and Year 5 return = -16 %, what is the average return for Stock A over this 5 year period? (Record your answer as a percent rounded to 1 decimal place. If your answer is negative, place a minus sign before your number with no space between the sign and the number. For example, record negative 14.284% as -14.3).

Answer 1

1

Project
Discount rate	10.000%
Year	0	1	2	3	4	5
Cash flow stream	-897803	214554	214554	214554	214554	214554
Discounting factor	1.000	1.100	1.210	1.331	1.464	1.611
Discounted cash flows project	-897803.000	195049.091	177317.355	161197.596	146543.269	133221.154
NPV = Sum of discounted cash flows
NPV Project =	-84474.54
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

2

Average return = (1-10-7-18-16)/5=-10%