Present value is where the value on a set date of a future payment is discounted to reflect the time value of money and other factors. This can also apply to a series of future payments. Present value calculations are commonly utilized in business and economics to provide a way to compare cash flows at different times. Present value can be described as the current worth of a future sum of money or stream of cash flows given a specified rate of return. (http://www.getobjects.com) Future cash flows
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CHAPTER 5 Net Present Value and Other Investment Criteria Answers to Problem Sets 1. a. A = 3 years‚ B = 2 years‚ C = 3 years b. B c. A‚ B‚ and C d. B and C (NPVB = $3‚378; NPVC = $2‚405) e. True f. It will accept no negative-NPV projects but will turn down some with positive NPVs. A project can have positive NPV if all future cash flows are considered but still do not meet the stated cutoff period. 2. Given the cash flows C0‚ C1‚ . . . ‚ CT
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liability. Investors in corporations have limited liability. They can lose their investment‚ but no more. Chapter 2 How to calculate Present values Question 6: Perpetuities An investment costs $1‚548 and pays $138 in perpetuity. If the interest rate is 9%‚ what is the NPV? Answer NPV = −1‚548 + 138/.09 = −14.67 (cost today plus the present value of the perpetuity). Question 7: Growing perpetuities A common stock will pay a cash dividend of $4 next year. After that‚ the dividends
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Part I A. Present Value with Discount rate of 7% = 15000/(1+7%) = 15000/1.07 = $14‚018.69 Present Value with Discount rate of 4% = 15000/(1+4%) = 15000/1.04 = $14‚423.08 B. Account A - Present Value with Discount rate of 6% = 6500/(1+6%) = 6500/1.06 = $6‚132.08 Account B - Present Value with Discount rate of 6% = 12600/(1+6%)^2 = 12600/1.1236 = $11‚213.96 C. Present Value of Gold Mine 7% = 4900000/1.07 + 61‚000‚000/(1.07)^2 + 85‚000‚000/(1.07)^3 = 45‚794‚392.52 + 61‚000‚000/1.1449 + 85
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Hertz purchases the fleet from GM for $325‚000‚ and Hertz is able to issue $200‚000 of five year‚ 8% debt in order to finance the project. All principal will be repaid in one balloon payment at the end of the fifth year. What is the Adjusted Present Value (APV) of the project? 17.1 a. The maximum price that Hertz should be willing to pay for the fleet of cars with all-equity funding is the price that makes the NPV of the transaction equal to zero. NPV = -Purchase Price + PV[(1- TC
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CONCEPT OF PRESENT VALUE SO IMPORTANT FOR CORPORATE FINANCE? The importance of concept of present value to the world of corporate finance is that present value calculations are widely used in business and economics to provide a means to compare cash flows at different times. Present Value’s definition and simplistic formula used for normal purchases‚ the concept’s importance to corporate finance and why present value is the very first topic taught in finance classes explain that present value is an
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Abstract This essay will discuss the net present value (NPV)‚ payback period (PBP) and internal rate of return (IRR) approaches for a project evaluation. It is often said that NPV is the best approach investment appraisal‚ which I why I will compare the strengths and weaknesses of NPV as well as the two others to se if the statement is actually true. Introduction To start of‚ the essay will attempt to explain the theoretical rationale of the net present value approach to investment appraisal as
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The internal rate of return (IRR) and the net present value (NPV) techniques are 2 investment decision tools that satisfy the 2 major criteria for the correct evaluation of capital projects. This criterion is that the techniques should incorporate the use of cash flows and the use of the time value of money. This makes them viable techniques for evaluating investment proposals. The Net Present Value is one of the techniques that are used by firms when evaluating which investment proposals to take
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$34‚229.07 Therefore the total cost today of your children’s college expense will be the addition of the 2 = $72‚326.88 This is the present value of my annual savings‚ which are an annuity‚ so to get the amount I am supposed to save each year would be: PV=72‚326.88 N=15 I=5.5 CPT PMT = 7‚205.6 57. Calculating Annuity Values: Bilbo Baggins wants to save money to meet three objectives. First‚ he would like to be able to retire 30 years from now with retirement
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Present Value is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate‚ and the higher the discount rate‚ the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows‚ whether they be earnings or obligations. Present Value of annuity is a series of equal payments or receipts that occur at evenly spaced intervals
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