Smith Company has the following annual cash flows: Year 0: –173,160 Year 1: 614,718 Year 2: –726,406 Year 3: 285,714 Which discount rate provides a positive net present value (NPV) given this information?
Smith Company has the following annual cash flows: Year 0: –173,160 Year 1: 614,718 Year 2: –726,406 Year 3: 285,714 Which discount rate provides a positive net present value (NPV) given this information?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Smith Company has the following annual cash flows:
Year 0: –173,160
Year 1: 614,718
Year 2: –726,406
Year 3: 285,714
Which discount rate provides a positive
Expert Solution
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Step 1
we need to find the discount rate by trial and error method
so when, NPV need to become zero or near value so that percentage is the discount rate
years | cashflows | PV @21 | PV cashflows @21 |
0 | –173,160 | 1 | –173,160 |
1 | 614,718 | 0.826 | 508031.40 |
2 |
–726,406 |
0.683 | -496145.07 |
3 | 285,714 | 0.564 | 161278.10 |
net present value | 4.43 |
By trial and error method we found that 21% is the discount rate
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