Net present value Accounting, Finance, SPSS Coursework (Coursework Sample)
NPV and discounted cash flow questionssource..
Contents TOC \o "1-3" \h \z \u Question 1: PAGEREF _Toc44104048 \h 1Question 2: PAGEREF _Toc44104049 \h 3Question 3: PAGEREF _Toc44104050 \h 6Refernces: PAGEREF _Toc44104051 \h 8
* A company expects a series of 24 monthly receipts of $3,600 each. The first payment will be received 1 month from today. Determine the present value of this series assuming an interest rate of 12% per year compounded semiannually.
PMT= Cash flow
P = Periodic payment
r = Rate per period
n = Number of period
For compounded semiannually we have to make annual interest rate into semiannual by 12%/2 = 6%
P = 3600*(1-(1+6%)^-24/0.06)
P = 3600*(1-0.2470)/0.06
P = 3600* (0.7530/0.06)
P = 3600* 12.55
P = $45181.29 (Bracker, Lin and Pursley, 2020)
* A company is considering starting a new product line. The new product line requires the installation of new machines and equipment. For this purpose, company wants to borrow money by issuing bonds of $10,000 for 12-year period. The interest on these bonds is to be paid at a rate of 10% per year. Compute the amount of interest to be paid to bondholders over 12-year period:
a) if the simple interest is charged.
b) If the interest is compounded annually.
a) if the simple interest is charged:
Issue price of bond = $10,000
Period = 12 years
Interest rate = 10%
Amount of interest to be paid over 12 years’ period = $10,000*10%*12 = $12,000
b) If the interest is compounded annually:
For this we shall compute compound amount by using compound amount formula then, later on, we shall compute compound interest directly deducting the compound amount from the principal amount.
S = P (1 + i) n
= $10,000 × (1 + 10%)12
=$10,000 × 3.138
Interest to be earned over 12-year period: $31,384 – $10,000 = $21,384
* ANB ltd has common equity of $35.5mn and $31.9mn of long-term debt and $10.3mn of preferred equity on its books. Required return on these funds are 12%, 8%, and 10%, respectively. Market values of the common equity and long-term debt are $46.6mn and $35mn, respectively. Market value of preferred equity is the same as its book value. Estimate WACC for the company given that its effective tax rate is 30%.
WACC = E/V*Re + D/V*Rd(1-t) + P/V*Rp
WACC = $46.6/91.9*35.5 + $35/19.9*31.9(1-30%) + $10.3/91.9
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