Question
In: Finance
What would you recommend if instead the company could undertake a project instead with this $900 000 with an ARR of 12% and a NPV of (-12 977) for a five year period.
A Company is considering two different commercial bills. One is at 6 per cent yield including fees for 180 days for a face value of $900 000. The other is at 11 per cent yield for 90 days for a face value of $900 000. How much will the company receive in each case? Show workings and comment on which would be the best investment.
What would you recommend if instead the company could undertake a project instead with this $900 000 with an ARR of 12% and a NPV of (-12 977) for a five year period.
Solutions
Expert Solution
1st Commercial bill
Purchase price = Face value / [ 1 + ( Yield * days / 365 ) ]
= 90,000 / [ 1 + ( 0.06 * 180 / 365 ) ]
= 90,000 / 1.0296
= $ 87,413.52
Receipt = 90,000 - 87413.52
= $ 2,586.48
2nd Commercial bill
Purchase price = Face value / [ 1 + ( Yield * days / 365 ) ]
= 90,000 / [ 1 + ( 0.11 * 180 / 365 ) ]
= 90,000 / 1.0543
= $ 85,369.02
Receipt = 90,000 - 85,369.02
= $ 4,630.98
Best investment in 2nd commercial bill.
Since NPV is negative, project should not be undertaken.
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