Question

WITH PROCESS:

A construction project has the following data: initial disbursement $ 40,000. The required rate of return is 9% per year.

Net cash income for the following years:

1st. Year $ 8,000 =

2nd. Year $ 10,500 =

3rd. Year $ 19,000 =

4th. Year $ 18,800 =

5th. Year $ 18,800 =

Net Present Value _____________
Determine the payback present value _______

PREPA is offering a $ 45 Bonus, payable semi-annually, for the next 20 years. The prevailing market interest rate is 8%. What is the value of the Bonus?
Present value $ ____________ is sold with a premium or discount ______________

El Sol Inc. is offering its bonds on the market at 8% annual interest but ensures that they are paid semi-annually for 7 years. The prevailing market interest rate is currently 10%. What is the value of the bonds? Present value $ __________ sold at a premium or discount____________

Answer 1

1.Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$40,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the required rate of return of 9%.
• Press the down arrow and CPT buttons to get the net present value.  

Net Present value of cash flows at 9% required rate of return is $16,385.68.

Cumulative cash flow in year 1= $8,000

Cumulative cash flow in year 2= $18,500

Cumulative cash flow in year 3= $37,500

  

Payback period= full years until recovery + unrecovered cost at the start of the year/cash flow during the year

= 3 years + ($40,000 - $37,500)/ $18,800

= 3 years + $2,500/ $18,800

= 3 years + 0.13

= 3.13 years.

2.Information provided:

Par value= future value= $1,000

Time= 20 years*2= 40 semi-annual periods

Coupon payment= $45 per semi-annual period

Yield to maturity= 8%/2= 4% per semi-annual period

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 40

PMT= 45

I/Y= 4

Press the CPT key and PV to compute the present value.

The value obtained is 1,098.96.

Therefore, the present value of the bond is $1,098.96.

It is a premium bond since the bond trades above the par value.

3.Information provided:

Par value= future value= $1,000

Time= 7 years*2= 14 semi-annual periods

Coupon rate= 8%/2= 4% per semi-annual period

Coupon payment= 0.40*1,000= $40 per semi-annual period

Yield to maturity= 10%/2= 5% per semi-annual period

Enter the below in a financial calculator to compute the present value:

FV= 1,000

N= 14

PMT= 40

I/Y= 5

Press the CPT key and PV to compute the present value.

The value obtained is 901.0136

Therefore, the present value of the bond is $901.01.

It is a discount bond since the bond trades below the par value.