A project will produce cash inflows of $3,640 every six months for 3 years with a...

A project will produce cash inflows of $3,640 every six months for 3 years with a final cash inflow of $9,400 six months after (three and a half years from now). The project's initial cost is $25,883. What is the net present value of this project if the annual required rate of return is 7.9 percent?

Now or Later, Inc. recently paid $2.10 as an annual dividend. Future dividends are projected at $2.5, $3 and $4 over the next three years, respectively. At the end of the third year, you expect to sell the stock for $34. The stock of the company is selling for $34 today. How much added wealth is expected from your investment in the stock given that the expected return is 6%?

Solutions

Expert Solution

Q. 1). Solution :-

Net present value = Present value of cash inflows - Present value of cash outflow.

Present value of cash inflows = Future cash inflows / (1 + r)T

(r = required return rate and T = time period expressed in years)

Present value of cash inflows = 3640 / (1 + 0.079)6/12 + 3640 / (1 + 0.079)12/12 + 3640 / (1 + 0.079)18/12 + 3640 / (1 + 0.079)24/12 + 3640 / (1 + 0.079)30/12 + 3640 / (1 + 0.079)36/12 + 9400 / (1 + 0.079)42/12

= 3640 / (1.079)0.50 + 3640 / (1.079)1 + 3640 / (1.079)1.50 + 3640 / (1.079)2 + 3640 / (1.079)2.5 + 3640 / (1.079)3 + 9400 / (1.079)3.50

= 3640 / 1.0387 + 3640 / 1.079 + 3640 / 1.1208 + 3640 / 1.1642 + 3640 / 1.2094 + 3640 / 1.2562 + 9400 / 1.3049

= 3504.38 + 3373.49 + 3247.68 + 3126.61 + 3009.76 + 2897.63 + 7203.62

= $ 26363.17

Present value of cash outflow = $ 25883 (Initial cost of project).

Accordingly, Net present value (NPV) of investment project = 26363.17 - 25883

= $ 480.17 (Rounded off to $ 480)

Conclusion :- Net present value (NPV) of investment project = $ 480 (approx).

jeff jeffy answered 1 year ago

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