(c).
We have following information -
Investment - $ 500,000
1st year cash inflow - $ 300,000
2nd year cash inflow - $ 300,000
Here, interest rate is the rate at which Present value of Future cash inflows equals to the Initial Investment.
Suppose interest rate is i,
then,
By solving this we will get interest rate.
Alternatively, we can also calculate the interest rate in excel with "=irr" formula. Please refer below spreadsheet for calculation -
Formula reference -
Thus, Interest rate is 13.07%
(d)
Present Value of Maturity amount of promissory note at yield rate is equal to current sale price of promissory note.
Suppose yield rate is Y for 90 days
then,
(1+Y) = 100,000/98,303
(1+Y) = 1.01726
Y = 1.01726-1
Y = 0.01726
Thus, Annual Yield rate would be = (0.01726/90)*365
= 0.06999
Yield rate p.a = 7%
(rounded off)
Please note- we can also calculate yield rate in excel using "=irr " formula as calculated in question-(c)
(2 HarKS) QUESTION 3 (4 marks) (c) You have been offered the chance to invest in...
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