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Examples

EXAMPLES


Examples1

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

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

    YEARPVIFAMOUNTP.V.

    012,000(2,000)

    10.9524 1,5001,428.6

    20.90702 1,3001,179.13

    30.8639 1,6001,382.17

    NPV1,990.00


Examples continued1

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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