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EXAMPLES


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

    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 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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