CFA Practice Question

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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.

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
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