- CFA Exams
- CFA Level I Exam
- Study Session 10. Corporate Finance (1)
- Reading 32. Capital Budgeting
- Subject 3. Investment Decision Criteria

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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.

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

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**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 |