Assume treasuries are trading at 3% interest. ($100 investment that pays9 % interest after one year 6% interest after two years and 7 %interest after 3 years) what is the net present value?
The treasuries are trading at 3%. This would be the discount rate calculating the Present Value of Interest Income
For calculating the Present value, we will use the formula
PV = Cash Flow / (1+ Discount Rate)^(Time), here time is in years from current time
Year | Cash Flow | Present Value of Cash Flow | Details/ Comments |
0 | -$100 | -$100 | This is presumed to be the investment, which is a Cash outflow, and therefore a negative sign. A cash inflow would be considered with a positive sign |
1 | $9 | $8.74 |
The interest earned on the investment = 100 (Investment) x 9% (Interest Rate) = $9 The PV of $9 earned after a year = 9/ (1+3%)^1 = $8.74 |
2 | $6 | $5.66 |
The interest earned on the investment in year 2 = 100 (Investment) x 6% (Interest Rate) = $6 The PV of $6 earned after 2 year = 6/ (1+3%)^2 = $5.66 |
3 | $7 | $6.41 |
The interest earned on the investment in year 3 = 100 (Investment) x 7% (Interest Rate) = $7 The PV of $7 earned after 3 year = 7/ (1+3%)^3 = $6.41 |
Net Present Value of Investment | $79.20 | NPV of Investment = Present Value of all Cash Flows (The Investment, a cash outflow and Earnings - Interest, the Cash Inflow) | |
The NPV of the Investment = $79.20
Assume treasuries are trading at 3% interest. ($100 investment that pays9 % interest after one year...
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