CFA Practice Question

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CFA Practice Question

Martin Computers is analyzing a project with the following cash flows:

CF0 = -256,000; CF1 = 56,000; CF2 = 85,000; CF3 = 125,000; CF4 = 67,000

Martin's cost of funds is 14% for such a project. What is the NPV of the project? Should Martin accept it?

A. 17,423; Accept
B. -17,432; Reject
C. 77,000; Accept
Correct Answer: B

The NPV of a project is the sum of all its discounted cash flows. Enter the cash flows into a financial calculator and solve for NPV. Do not forget to enter outflows as negative cash flows. On this basis, NPV @ 14% = -17,432. Negative NPV projects should be rejected.

User Contributed Comments 15

User Comment
orchid how do i solve for NPV with BaII TI?
0is4eva On the HP12C:
CF0 := -256000,
CFj := 56000, CFj := 85000, CFj := 125000, CFj := 67000
(CFj entered four times --> n := 4)
i := 14
Press <f><NPV> to calculate NPV.
Nathan on the TI BAII Plus...
2nd [CLR Work]
CFo = 256,000 [+/-], [ENTER], [down arrow]
C01 = 56,000, [down arrow], [down arrow]
C02 = 85,000, [down arrow], [down arrow]
C03 = 125,000, [down arrow], [down arrow]
C04 = 67,000, [down arrow], [down arrow]
14 [ENTER] {ie. I = 14}
[down arrow]
result ==> NPV = -17,431.63495
Kapil can someone elaborate how NPV is calculated ?
smillis Kapil -- i assume beyond the calculation above.

NPV is a combination of combining how much is being spent to how much is being earned, discounted by time.

In this problem, 256,000 is spent at the begining, generating the cashflows. The question is whether those cashflows, discounted to today, will be greater or less than that cost.

256,000 (spend now) versus
56,000/(1.14)^1 + 85,000(1.14)^2 + 125,000(1.14)^3 + 67,000/(1.14)^4 = 238,568 (receive, discounted to today)

Highly recommend using your calculator...
Farina Does anyone know how to remove old entries from the CF registers on the BAII+? I've got old, uneven CF data in there, over a 5-year tenor. To solve this, all I can do is set Cf5=0, which grossly distorts the negative NPV figure. I've tried 2nd[CLR TVM] and 2nd [CLR WORK] but nothing's worked. Any suggestions?
bikegeek Farina-
Just tested on my own as well, go to CF function and hit 2nd clr work for each field that has a value, that should take care of it also
SriSri I was getting +77,000 So accepted!
And I was using BAii Cal missing a one key-stroke its interesting.

This is how I ended up:

2nd QUIT
2nd [CLR Work]
CFo = 256,000 [+/-], [ENTER], [down arrow]
C01 = 56,000, [Enter], [down arrow]
C02 = 85,000, [Enter], [down arrow]
C03 = 125,000, [Enter], [down arrow]
C04 = 67,000, [Enter], [down arrow]
14 [ I fogot to pressEnter here ] {ie. I = 14}
[down arrow]
result ==> NPV = 77,000

Answer conatians this, to catch you if u fall into this category, as we are in a hurry we will defintely fall here. :)
hero2607 thanks Nathan
harpalani Another perspective: IRR comes 10.82% which is less than 14% cost of capital, hence rejected.
nabilhjeily im using the simulator of hp 12 c classic and all i get is the answer -381.3955 can any body tell me why?
nabilhjeily ok guys i figured it out on the simulator : hp12c
always start by clearing memory (f) (fin) (f) (reg)

256000 (chs) (g) (cf0)
56000 (g) ( cfj)....
14 (i)
(f) (npv)...result -17,431...
bidisha @ farina: also you can do 2nd reset enter to clear all the CF fields simultaneously rather than one by one
chipster I don't think this question is fair. They do not give you the formula for NPV in the study notes

NPV = E CF1/(1+r)t
bfeitosa BA II

After finding NPV, press IRR [ENTER]. It's useful to compare the IRR with WACC for second rule verification. If it is less than WACC, good chances your answer is correct on the first rule.
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