Question

1. Your company is offered a project that will yield $145,000 in two years. The project requires an investment of $125,000 now. You could otherwise save those funds to earn an interest rate of 7.5%

1. If you saved the funds, how much money would you have after two years?

2. If you wanted $145,000 in the bank after two years, how much would you have to invest today?

3. What is the net benefit of the project in two years? Should your company undertake the project?

4. What is the net benefit of the project today? Should your company undertake the project?

Answer 1

Part A:

Future Value:

Future Value is Value of current asset at future date grown at given int rate or growth rate.

FV = PV (1+r)^n
Where r is Int rate per period
n - No. of periods

Particulars	Amount
Present Value	$         125,000.00
Int Rate	7.5000%
Periods	2

Future Value = Present Value * ( 1 + r )^n
= $ 125000 ( 1 + 0.075) ^ 2
= $ 125000 ( 1.075 ^ 2)
= $ 125000 * 1.1556
= $ 144453.13

Part B:

Present Value:

Present value is current value of Future cash flows discounted at specified discount Rate.

PV = FV / (1+r)^n
Where r is Int rate per period
n - No. of periods

Particulars	Amount
Future Value	$          145,000.00
Int Rate	7.5000%
Periods	2

Present Value = Future Value / ( 1 + r )^n
= $ 145000 / ( 1 + 0.075 ) ^ 2
= $ 145000 / ( 1.075 ) ^ 2
= $ 145000 / 1.1556
= $ 125473.23

Part C:

Net Benifit from Project after 2 Years = Project CFs - Future Value of Investment

= $ 145000 - $ 144453.13

= $ 546.87

Part D:

Net Benifit from Project Today = PV of Prject CFs - Investment available today

= $ 125473.23 - $ 125000

= $ 473.23