Net Present Value and rate of return

flora33

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Mar 10, 2008
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3. Calculate the NPV and rate of return for each of the following investments. The opportunity cost of capital is 20 percent for all four investments.

1- Initial Cash Flow: -10,000 C0 Cash Flow in Year 1, C1: +18,000
PV: 18000 / 1.20 = 15000 NPV: 15000 – 8000 = 7000
rate of return: 18000 - 10000 / 10000 = 80%


2- Initial Cash Flow: -5,000 C0 Cash Flow in Year 1, C1: +9,000
PV: 9000 / 1.20 = 7500 NPV: 7500 - 4000 = 3500
rate of return: 9000 - 5000 / 5000 = 80%

3- Initial Cash Flow: -5,000 C0 Cash Flow in Year 1, C1: +5,700
PV: 5700 / 1.20 = 4750 NPV: 4750 – 700 = 4050
rate of return: 5700 - 5000 / 5000 = 14%

4- Initial Cash Flow: -2,000 C0 Cash Flow in Year 1, C1: +4,000
PV: 4000 / 1.20 = 3333 NPV: 3333 – 2000 = 1333
rate of return: 4000 - 2000 / 2000 = 100%
a. Which investment is most valuable? The fourth investment is the most valuable at 100% return
b. Suppose each investment would require use of the same parcel of land. Therefore
you can take only one. Which one? Hint: What is the firm’s objective: to earn a high
rate of return or to increase firm value?
In this example, the assumption is that the firm’s objective is to earn a high rate of return, correct? So wouldn’t it make sense to also choose the fourth investment?

Flora
 
Re: NPV and rate of return

Wish I could help Flora...but I have no idea what that is, or what you're trying to do...
I'll wait for TK to illuminate me :idea:
 
Re: NPV and rate of return

Denis said:
Wish I could help Flora...but I have no idea what that is, or what you're trying to do...
I'll wait for TK to illuminate me :idea:


Haha, thanks Denis... You pretty much know as much as I do at this point! Maybe I should spruce it up so it might make more sense to innocent on-lookers!
 
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