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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%

- 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

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/