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.