Name: WARDAH MUKHATR

20396

Section-B

Assignment # 03

Prof. Ajid-ur-Rehman
Question 1
You estimate that you will need about $80,000 to send your child to college in eight
years. You have about $35,000 now. If you can earn 20 percent per year, will you
make it? At what rate will you just reach your goal?
Given Data Formula Solution
Future value FV $ 80,000 Fv/Pv 2.2857142857
Present value PV $ 35,000 〖𝐹𝑣 =𝑃𝑣 (1+𝑟) 〗 ^𝑛 1/n 0.125
〖 (1+𝑟) 〗 ^𝑛=𝐹𝑣/𝑃𝑣
Rate r % ? r 0.1088626181
(1+r)= 〖𝐹𝑣 /𝑃𝑣 〗 ^(1/𝑛)
Investment Period n yr. 8
r= 〖𝐹𝑣 /𝑃𝑣 〗 ^(1/𝑛)−1
Remakes
r= 10.88 % will be the interest rate t
reach at $ 80,000 in 8 year
8 % will be the interest rate to
ach at $ 80,000 in 8 year
Question 1
You’ve been saving up to buy the Godot Company. The total cost will be $10 million. You currently
about $2.3 million. If you can earn 5 percent on your money, how long will you have to wait? At 16
percent, how long must you wait?
Given Data Formula
Future value FV $ 10,000,000
Present value PV $ 2,300,000
Interest Rate 1 r (1) % 5%
Investment Period (1) n(1) yr. ?
Interest Rate (2) r (2) % 16%
Investment Period (2) n (2) yr. ?
llion. You currently have
have to wait? At 16

Solution
for interest rate 1
Fv/PV 4.34783
1+r 1.05
log (fv/pv) 0.63827
log(1+ r) 0.02119
n 30.1224
Remarks It will take 30 years to achieve at 10 million with an interest rate of 5%

for interest rate 2

Fv/PV 4.34783
1+r 1.16
log (fv/pv) 0.63827
log(1+ r) 0.06446
n 9.90214
Remarks It will take 9.9 years (~10 years) to achieve at 10 million with an interest rate of 16%
Question 3

Careem has an opportunity to invest in a new high-speed computer that costs PKR 55,000. The computer will generate cash flows (from cost savings) of
PKR 23,000 one year from now, PKR 12,000 two years from now, and PKR 17,000 three years from now. The computer will be worthless after three
years, and no additional cash flows will occur. Careem has determined that the appropriate discount rate is 8 percent for this investment. Should Careem
make this investment in a new high-speed computer? What is the net present value of the investment? What is the internal rate of return?

Given Data
𝑃𝑣= 𝐶𝐹⁄((1+𝑟)) 𝑛
ICO PKR 55,000 Formula
NPV=TPV-ICO
CF 1 PKR 23,000
CF 2 PKR 12,000
CF 3 PKR 17,000
r % 8%
NPV ??
 Solution
PV1 21296.296
ill generate cash flows (from cost savings) of PV2 10288.066
. The computer will be worthless after three
8 percent for this investment. Should Careem PV3 13495.148
nt? What is the internal rate of return?
TPV 45079.510

NPV -9,920.49
𝑣= 𝐶𝐹⁄((1+𝑟)) 𝑛
PV=TPV-ICO
Using Excel formula
-9,920.49

Remarks

Answer is negative so we should not

invest in this high-speed computer
Question 4
After making an initial cash outflow of PKR 100,000,
the Islamabad Fish Farm expected to generate net cash Using Method of i
flows of PKR 34,432, PKR39,530, PKR39,359, and
PKR32,219 over the next 4 years. Rate 1 7%
a) Calculate the internal rate of return IRR x
Given Data Formula Rate 2 53%
ICO PKR 100,000 𝑥=(𝑇𝑜𝑡𝑎𝑙 𝑑𝑖𝑓𝑓. 𝑜𝑓 𝑃𝑉)/(𝐷𝑓𝑓. 𝑜𝑓 𝑃𝑉) 𝑟𝑎𝑡𝑒 𝑑𝑖𝑓𝑓. Rate difference
CF1 PKR 34,432
CF2 PKR 39,530 Pv Differeence
CF3 PKR 39359 TPV difference
CF4 PKR 32219
IRR ? IRR

Remarks
The IRR for the current questio
 Solution
Using Method of interpolation Using Excel Formula
NPV PV ICO
24,810.39 124,810.39 CF1 -100,000
100,000 CF2 34,432
-39,530.00 56,260.12 CF3 39,530
47% CF4 39359
32219
24,810.39 IRR
68,550.28 17%
check
0.36192987
0.16829739 NPV
17% 0

or the current question is 17%

Question 5
The following cash-flow streams need to be analyzed:
CASH-FLOW End of year Cash flows
STREAM 1 2 3 4 5 Formula
A 100 200 300 200 100
B - 500 -300 100 150 〖𝐹𝑣 =𝑃𝑣(1+𝑟) 〗 ^𝑛
C - - - - 1200
D 200 - 500 - 300

a.       Calculate the future (terminal) value of each stream at the end of year 5
with a compound annual interest rate of 10 percent.

b.      Compute the present value of each stream if the discount rate is 14
percent.

Formula
𝑃𝑣= 𝐶𝐹⁄((1+𝑟)) 𝑛
 Solution
A Given Data
Intreset rate 10%
A B C D
FV 1 146.41 292.82
〖𝐹𝑣 =𝑃𝑣(1+𝑟) 〗 ^𝑛 FV 2 266.2 665.5
FV 3 363 -363 605
FV 4 220 110
FV 5 100 150 1200 300
TFV 1095.61 562.5 1200 1197.82
B Given Data
Discount rate 14%
Solution
A B C D
PV 1 87.72 175.44
𝑣= 𝐶𝐹⁄((1+𝑟)) 𝑛 PV 2 153.89 384.73
PV 3 202.49 -202.49 337.49
PV 4 118.42 59.21
PV 5 51.94 77.91 623.24 155.81
TPV 614.46 319.36 623.24 668.73