Question

You are making a $120,000 investment and feel that a 16% rate of return is reasonable, given the nature of the risks involved. You expect to receive $48,000 in the first year, $54,000 in the second year, and $76,000 in the third year. You expect to pay out $12,000 as a disposal cost in the fourth year. What is the net present value of this investment given your expectations?

A firm is considering a potential investment project that would result in an immediate loss in free cash flow of $80 Million, but would generate positive free cash flow of $7 Million next year. The firm expects the free cash flow produced by the project to grow annually at 3% forever. The firm's weighted average cost of capital (WACC) is 6%. What is the NPV of the project? [Enter your answer in millions of dollars rounded to two decimal places. For example, if your answer is -1.23 Million, then enter just -1.23 in the answer box.]

Sara is investing $1,000 today. Which one of the following will cause the greatest increase the future value of that amount?

Question 1 options:

	1) Increasing the investment time period.
	2) Paying interest only on the principal amount.
	3) Paying simple interest rather than compound interest.
	4) Paying interest only at the end of the investment period rather than throughout the investment period.
	5) decreasing the interest rate.

Answer 1

Answer A)

Initial Investment : $ -120,000                                 Negative sign shows outflow of the money

Casshflow (First year)   =    $48000

Second Year   =   $ 54000

Third year :   $ 76000

Fourth year ; $ -12000    

Present Value of future cashflows : Discount each cashflows to the rate of return expected i,e, : 16%

    =$ 123572.59

NPV = Initial investment + PV of futue cash flows   = -120000+ 123572.59 =     $3572.5

Answer B)

Cashflow 0 ; - $80 Million

Cashflow 1 : $ 7 million

Grow annually forever at 3%

It comes under growing perpetuity : PV of growing perpetuity : D   / (r -g)              7 / (.06-.03)   = $ 233.34

NPV = -80+233.34 = $ 153.33 million

C)   Sara investing $1000 today . Lets take for example : period is 2 years rate of interest is 10%

FV= 1000* (1.1)^2 =1210

if we increase the time period the value of 1.1 is going to increase much more than the other options given So A)

Paying Interest only at the principal amount is the definition of Simple Interest , but to earn or grow money you would want your money to grow at compund interest , which provides interest on interest. Other options are not going to provide you growth for the investmemnts made. as decreasing the interst rate would decrease the growth rate of the investment so correct option is A)