# Net present value Accounting, Finance, SPSS Coursework (Coursework Sample)

NPV and discounted cash flow questions

source..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

Question 1:

* 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.

P=PMT(1-(1+r) ^-n/r)

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.

Ans.

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

= $31,384.28

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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