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examples

- Imagine you have purchased a stock at 2000 dollars and the expected returns for three years are as follows

Year one =1,500

Year two =1,300

Year four =1,600

The net present value of the stock would be calculated as follows assuming a discounting rate of 5%

Examples continued

- NPV = PV of cash in flows-PV of cash outflows
- PVIF=1/(1+K)^n

= 1/(1+0.05)^1=0.9524

=1/(1+0.05)^2=0.90702

=1/(1+0.05)^3=0.8639

THE NPV

YEAR PVIF AMOUNT P.V.

0 1 2,000 (2,000)

1 0.9524 1,500 1,428.6

2 0.90702 1,300 1,179.13

3 0.8639 1,600 1,382.17

NPV 1,990.00

EXAMPLES CONTINUED

CALCULATE THE VALUE OF THE COST OF THE ABOVE STOCK IN THE NEXT THREE YEARS.

FVAt = PMT * {[(1+r)t –1]/r}

= 2,000*{[(1+0.05)^3-1]/0.05

=2,000*3.1525

=6,305=FUTURE VALUE ASSUMING IT SHALL BE PAID TODAY. http://allhomeworktutors.com/

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