- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 5. Capital Investments and Capital Allocation
- Subject 2. Capital Allocation
CFA Practice Question
Which of the following amounts is closest to the net present value of a project that contributes $5,000 at the end of the first year and $8,000 at the end of the second year? The initial cost is $3,000. The appropriate interest rate is 8% for the first year and 9% for the second year.
B. $8,426
C. $8,363
A. $8,585
B. $8,426
C. $8,363
Correct Answer: B
NPV = -3000 + (5000/1.08) + 8000/[(1.08)(1.09)] = $8,425.52
User Contributed Comments 19
| User | Comment |
|---|---|
| jaan | How to calculate on BAII Plus |
| haarlemmer | The same as it is from the answer. Sometimes simply is the easier way.:-> |
| cptp | is there no way to do such problems on the calculator? |
| Bibhu | It is much easier the way answer has been provided than to go for calculator. |
| julescruis | You can only calculate cash flows easily if the cost of capital remains constant. You first discount the second period cash flow at 9% and add 5000 and then discount back one period at 8%. |
| hannovanwyk | this is not one for the calculator! |
| MattNYC | why is the 8000 cf discounted back 1.09X1.08 and not to the second power of 1.09?? is it because the discount rates are not the same?? |
| sanyukta | god, this question is so simple to do on a calculator.. do it the simpler way and key in the figures.. old fashion: paper and pen.. |
| Poorvi | MattNYC, yes, because the discount rates are different for year 1 and year 2, the denominator is 1.08x1.09 instead of 1.09^2 |
| vert | I calculated in excel and got a slightly different answer 8,425.4162=8,425... |
| Bill12345 | how do you do on calculator? |
| shiva5555 | i just used 8.5 as the rate of return on the calculator and was able to get it. |
| papajeff | I used 8 for both periods, and got $8488 as an answer. The NPV must be a bit lower than that, so process of elimination works. |
| moneyguy | I used BAII and used 8.5 for I. it yields 8403, so I would've chosen B on the exam. Maybe a shortcut to save 30 seconds... |
| johntan1979 | No, it's wrong to average the interest rates. There's no way to solve this except to really understand the formula and use it. |
| jonan203 | wow, they really want to make sure you know the formulas inside out... |
| Selltir | NPV should follow the following logic, period 1 = CF/(1+WACC)+CF/(1+WACC)period(1+WACC)period2 |
| praj24 | Good Question, Caught me out! Thanks AN |
| ana2 | I also got 8425.42 on the calculator. thanks Poorvi for answering the second ror question. I initially used the square of 1.09. Good Question |