Capital budgeting Homework questions

Simple interest and compound interest

1. a. Johnny invests $100 for 3 years. Calculate the value of investment if the Simple interest is 10%

Answer

Simple interest

b. Calculate the value of the investment if the Compound interest is 10%.

Answer:

c. If $1,000 is invested for 2 years at compound interest of 10% per year, what will be the deposit have grown to by the end of the period?

Answer:

2. Discounting single sums

Money Bags is expecting to receive $16,751 in six years. Interest rate will be 5% for the whole years. Calculate the present value of Money Bags receipt

From the PV table the interest factor for 6 years at 5% is..

3. We need $10,000 at the end of two years. Assuming we could earn interest at 7% p.a, how much should we invest now?

PV =

4. Present value of Annuity

Henry is going to receive $150 every year for 12 years. The annual interest is 6%. Calculate the present value of Henrys annuity.

PV =

5. Perpetuities- annuities last forever

Victoria is expecting to receive $2,000 a year forever. Interest rates are expected to remain constant at 5%.

Calculate the present value of Victorias perpetuity.

PV = 1/r

PV =

Payback period

6.Horizon Ltd considering a project that will require an investment in machinery of $80,000 and which will generate an income of $15,000 in the first year, increasing by $5,000 each subsequent year. The project is expected to last for 5 years and the machinery is not expected to have any residual value. The cost of capital for Horizon is 10%.

a. calculate the payback period.

b. Calculate the NPV

Solution

a. Payback period

Year Inflows Cumulative cash flow

$ $

b. Net present value

Year Inflows Discount factor Present value

$ @ 10% $

7. A project has the following cash flows:

Year cash flows

0 (75,000)

1 20,000

2 30,000

3 50,000

a. What is the payback period?

b. If the cost of capital is 10%, what is the NPV?

Payback period

Year Inflow Cumulative inflows

Payback period =

Net present value

Year Inflows Discount factor Present value

@10%