plx anserr using formula not excel Question4 a) Consider the following cash flow

Question

plx anserr using formula not excel

Question4 a) Consider the following cash flow diagram. What is the value of X if the rate o 5%? return is 0 $400 (3 marks) Consider the following "present worth versus interest rate" graph for a well behaved investment. the interest rate at B is 20%, then which of the following best describes the analysis of the estment ii, iii. iv. none of the above are tr the IRR of the investment is less than 20% the IRR of the investment is equal to 20% the IRR of the investment is greater than 20% 0 Interest Rate ma

Explanation / Answer

a)

PV of cash out flow = PV of cash inflow

C0 = C1/ (1+r) + C2/(1+r)2

Where,

C0 = Cash flow at year 0 = $ 400

C1 = Cash flow at year 1 = X

C2 = Cash flow at year 2 = X

r = Discount rate = 15 % or 0.15 p.a.

Substituting the values in above formula, we get the value of X as:

X/ (1+15%) + X/ (1+15%) 2= $ 400

$ 400 = X/ (1+0.15) + X/ (1+0.15) 2 = $ 400

X/ (1.15) + X/ (1.15)2 = $ 400

X/ (1.15) + X/ (1.15)2= $ 400

(X x 1.15 + X)/ (1.15)2= $ 400

X x(1.15 + 1)/ (1.15)2= $ 400

X x(1.15 + 1)/ 1.3225 = $ 400

2.15 X = $ 400 x 1.3225

2.15 X = $ 529

X = 539/2.15 = 246.0465116 or $ 246.05

Value of X is $ 246.05

b)

The graph shown in the question, illustrate a project’s present worth against various discount rate.

The present worth is shown on Y- axis, and cost of capital on x-axis. IRR is the discount rate where the present worth or NPV of a project is 0.The point on x-axis where NPV crosses the x-axis is the IRR of the project. So on the given graph, point E is IRR of investment which is greater than 20 %, as it is on the right side of point B (i.e.20%) on x-axis of the graph.

Hence option “iii. The IRR of the investment is greater than 20 %” is correct answer.

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