Microsoft Office Tutorials and References
In Depth Information
Review Questions
REVIEW QUESTIONS
You will find these examples in the Excel Chapter 29 file:
1. You are to invest $6,000 today and receive $3,000 in year 1, $2,000 two years
from now, and $3,000 three years from now. Using a discount rate of 10 per-
cent, what is the net present value of this investment?
2. Using a discount rate of 10 percent, calculate the NPV of the following
investment:
Time
0
1
2
3
4
5
Cash Flow
$3,000
$5,000
$3,000
$3,000
$3,000
$3,000
3. An author signs a contract with a publisher. He has one of three choices. His
rst option is to receive an immediate lump sum of $300,000. His second choice
is to receive $160,000 both at the end of year one and at the end of year two.
The third option is to receive $400,000 three years from now. Which choice
is the best one for him using a discount rate of 10 percent?
4. You are to invest $6,000 today and receive $3,000 in year 1, $2, 000 two years
from now, and $3,000 three years from now. Using a discount rate of 10
percent, what is the NPV of the investment? What is the IRR of this investment?
5. Calculate the IRR of the following investment:
Time
0
1
2
3
4
5
Cash Flow
$3,000
$5,000
$3,000
$3,000
$3,000
$3,000
6. The
rst option the author had in review question 1 was to receive $300,000 today.
Now compute the IRR of the second and third choices:
For the second option , assume that the initial investment was
$300,000 (as the
first option is:
receive a lump sum of $300,000
). In this option you have three
cash flows: a cash flow of
$300,000 at time 0 and two cash flows: $160,000 at
time 1 and one cash flow of $160,000 at time 2.
For the third option , assume that the initial investment was
$300,000 (as
the first option is:
receive a lump sum of $300,000
). In this option you have
two cash flows: a cash flow of
$300,000 at time 0 and one cash flow of
$450,000 at time 3.
Calculate the IRR of these two options.
ANSWERS
1. $634.11.
2. $1,099.63.
3. The
rst option is $300,000, the second option has an NPV of $277,685.95, and
the third has an NPV of $273,205.38.
4. The NPV is $634.11. The IRR is 15.94 percent.
5. 15.57 percent.
6. 4.41 percent and 7.46 percent.
 
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