Question

You are given the following prices of US Treasury Strips (discount or zero coupon bonds):

Maturity	Price (per $100 Face Value)
1	$98.8
2	$97.5
3	$95.6
4	$93.1

Suppose you are offered a joint venture drug development project which returns the following (assume certain) cashflows:

• $100m at the end of year 2
• $150m at the end of year 3
• $200m at the end of year 4

If the project requires a staged investment of $200m today, and another $200m investment 1 year from now, what is its NPV using the spot rates computed above. (Note: Your answer should be expressed in units of millions of dollars.)

$_____ million

Show the work, please.

Answer 1

cash outlay

- year 0: 200m

-year1: 197.6(98.8*2) as presnt value of 100 is 98.8 then of 200 is 98.8*2

so total cash outlay is 397.6m

cash inflow

year 2: 97.5

year 3:143.4(if at year 3 pv of cash inflow 95.6 of amount 100 then for 150 is 150*95.6/100)

year 4:186.2(if at year 4 pv of 100 is 93.1 then for 200 is 93.1*2)

total cash inflow is 427.1m

NPV 29.5million