Question

You are presented with an investment opportunity. For $10,000 today, you will receive $3,000 at the end of year for five years. If a comparable opportunity returns 8%, what is the NPV of this investment rounded to the nearest dollar? a. $5000 b. S2000 O c. $1978 d. $2412 You wish to establish a scholarship fund which gives $1,000 a year forever. If the principal can earn 4% per year, how much is needed to establish the fund? a. $40.000 b. S14,000 c. $25,000 d. $33,333 Question 18 An investment is expected to distribute S8 next year and the distribution is expected to increase by 2% each year. If the appropriate discount rate is 6%, what is the present value of the investment? Not yet answered Marked out of 7.50 O a. $400 b. S133.33 Flag question O c. $125 d. $200 What is the rate of return of an investment product which costs $25,000 and returns $2,000 at the end of each year for 20 years? Question 19 Not yet answered a. 1.75% Marked out of 7.50 b.5.62% Flag question C. 2.50% d. 4.96%

Answer 1

a.Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=3000/1.08+3000/1.08^2+3000/1.08^3+3000/1.08^4+3000/1.08^5

=11978.13

NPV=Present value of inflows-Present value of outflows

=11978.13-10,000

=$1978(Approx)

b.present value of perpetuity=Annual cash flows/interest rate

=1000/0.04

=$25000

c.Present value=Distribution expected next year/(Discount rate-Growth rate)

=8/(0.06-0.02)

=$200

d.Let rate of return be x%

At this rate;present value of annual return=25000

25000=2000/1.0x+2000/1.0x^2+............+2000/1.0x^20

Hence x=rate of return=4.96%(Approx)