1) If you invest $3,200 per year for 30 years and earn an annual return of 10%,
ID: 2751872 • Letter: 1
Question
1) If you invest $3,200 per year for 30 years and earn an annual return of 10%, how much will you have at the end of 30 years?
2) You have a choice of three investments, all of which have equal lives and pay the same total dollar amount of cash flows. Investment A has a large cash flows at the beginning and small cash flows at the end. Investment B has a large cash flows at the end and small cash flows at the beginning. Investment C has the same cash flow every year. If the interest rate is the san1e for all three investments, which investment has the largest present value?
3)
Your company is considering a project with the following cash flows: Initial Outlay= $2,134
Cash Flows Year 1-7 = $560/yr.
Compute the internal rate of return on the project.
Explanation / Answer
1) FV = C0 * ( 1 + r)n C0 = Cash flow at period 0 = 3200 r = rate of return = 10% n = number of period = 30 Hence , FV = 3200 * ( 1 +0.10) 30 = 3200 * 17.45 = 55840 Hence the amount received after 30 years after considering time value of money - 55840 2) Investment A has the largest NPV as it has larger cash flows at the beginning and as per time value of money the value of money received today is better than the same value received later Hence larger amount received earlier on in the life cycle of the project will yeild higher NPV 3) IRR is where NPV = 0 T0 T1 T2 T3 T4 T5 T6 T7 IRR Cash Flows -2134 560 560 560 560 560 560 560 18% The above IRR is calculated in excel by using IRR function Hence IRR = 18%
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