Question

1. How should you determine whether to take or reject a project? What measure should you use to figure out the dollar value of the project today?

2. If rate of return is positive, can percentage price change be negative?

3. How many years will it take you to double your money if your rate of return is 7% annually?

Can you please show math. Thanks

Answer 1

Answer(1): A project needs to be approved or rejected, it requires heavy one time investment, we can check feasibility of project on the basis of Net present value (NPV).

Net present value is the difference between the present value of cash inflows and present value of cash outflows, If NPV is positive then the project is approved otherwise rejected. P

Present value of future cash inflows is calculated by discounting the expected future cash inflows to present value factor. This method of capital budgeting uses Time value of money concept in which effect of time period is seen. Discounting factor is used to the present worth of future expected cash inflows

Formula: NPV = Present value of cash Inflows - Present value of Cash outflow.

Answer(2): Yes, If rate of return is positive, percentage price change can be negative.

Answer(3): There is one Rule of 72 that states the time required to double your money equals 72/rate of return.

72 / 7, It will take 10.28 years to double your money.