Tags
#analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria
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

NPV = -3000 + (5000/1.08) + 8000/[(1.08)(1.09)] = $8,425.52 Tags #analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria 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 Answer ? Tags #analyst-notes #cfa-level-1 #corporate-finance #reading-35-capital-budgeting #study-session-10 #subject-3-investment-criteria 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 Answer Correct Answer: B NPV = -3000 + (5000/1.08) + 8000/[(1.08)(1.09)] =$8,425.52
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dy>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk.<body><html>

#### Original toplevel document

Subject 3. Investment Decision Criteria
on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better. Reject if NPV is less than or equal to 0. <span>NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k) t where k is the cost of capital and t is the year number.

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