Independent solution

How to solve this Interest Rate Valuation question

Setup

Setup

Combine revenue and additional investment occurring at the same year-end before discounting.

NPV⁡=−600+501.15+1001.152+∑t=351501.15t\operatorname{NPV}=-600+\frac{50}{1.15}+\frac{100}{1.15^2}+\sum_{t=3}^{5}\frac{150}{1.15^t}

Model

Model

The year-one net receipt is 50, the year-two net receipt is 100, and years three through five each contribute 150.

NPV⁡=−600+43.4783+75.6144+342.9648\operatorname{NPV}=-600+43.4783+75.6144+342.9648

Compute

Compute

Their present value is 378.0575, which is less than the 600 paid immediately by 221.9425.

NPV⁡=−221.9425\operatorname{NPV}=-221.9425

Answer

Answer

The net present value rounds to negative 222, corresponding to choice A.

NPV⁡≈−222(A)\boxed{\operatorname{NPV}\approx-222\quad\text{(A)}}

Calculator reproduction

BA II Plus keystrokes

Check END/BGN, period, sign, TVM, and cash-flow setup

  1. CF; 2nd CLR WORK; CF0=-600; C01=50; C02=100; C03=150; F03=3; NPV; I=15; CPTNPV = -221.94The worksheet period is one year; the initial outlay is negative and the three final 150 receipts use frequency 3.