1. What is the future value in 7 years of Tk.

10,000 invested in an account with a stated annual interest

rate 8 percent compounded annually?
Sol.
Given that,
Present value (PV) =Tk. 10,000
Number of years (N) =7
Interest rate (R) =8% = 0.08
Future value (FV) =?
FV = PV (1 + R) N
=Tk. 10,000(1+.08)7
= 17,138
2. The present value of following cash flow stream is Tk. 6,453 when discounted at 10 percent
annually. What is the value of the missing cash flow?
Year
Cash Flow (Tk.)
1
1200
2
?
3
2400
4
2600
Sol.
PV

FV
(1+R)N

PV of year 1 CF :
PV of year 3 CF :
PV of year 3 CF :

1200
(1+.1)1
2400
(1+.1)3
2600
(1+.1)4

Tk. 1,090.91

Tk. 1,803.16

Tk. 1,775.83

So, the PV of the missing CF (2nd Year) is:

Tk. 6,453 1,090.91 1,803.16 1,775.83 = Tk. 1,783.10
3. Calculating Payback Period and NPV Fuji Software, Inc., has the following mutually exclusive
projects.
Year
Project A
Project B
0
-Tk. 10,000
-Tk. 12,000
1
Tk. 6,500
Tk. 7,000
2
Tk. 4,000
Tk. 4,000
3
Tk. 1,800
Tk. 5,000
Sol.
(i)
Year
1
2
3
Md. Jahidul Islam Khan
Id: 2014110014
Program: MBA
Southeast University

Cash Flow (Tk.)

6,500
4,000
1,800

Cumulative Cash Flow (Tk.)

6,500
10,500
12,300

Page 1

Project A:
Pay Back Period
(PBP)

NCO-C
D

A+

A=Break even year

NCO=Net cash outflow/Initial
Investment
C=Cumulative cash flow of the
breakeven year

Tk. 10,000-Tk. 6,500

Tk. 4,000

1+

Here,

D=Cash inflow after the break

even year

1.875 years

Project B:
Year
1
2
3
Pay Back Period
(PBP)

Cash Flow (Tk.)

7,000
4,000
5,000

= A+

NCO-C
D

= 2+

Tk. 12,000-Tk.
11,000
Tk. 5,000

Cumulative Cash Flow (Tk)

7,000
11,000
16,000
Here,
A=Break even year
NCO=Net cash
outflow/Initial
Investment

C=Cumulative cash flow

of the breakeven year
D=Cash inflow after the
= 2.20 years
break even year
Since project A has a shorter payback period than project B has, the company should choose
Project A.
(ii) Project A:
C1
Net Present Value
(NPV)

C2
+

(1+R)N1
Tk. 6.500

-Tk. 139.72

5,652

(1+R)N2

Tk. 4,000
+

(1+.15)1

C3

(1+.15)2
3,025

Here,

(1+R)N3

NCO

Tk. 10,000

R=Interest Rate/Discount
Rate

Tk. 10000

N=Number of years

NCO=Net cash
outflow/Initil Investment

Tk. 1,800
+

(1+.15)3

1,184

C= Cash Flow

Project B:
C1
Net Present
Value (NPV)

(1+R)N1
Tk.
7,000

C2
+

(1+.15)1
=

Md. Jahidul Islam Khan

Id: 2014110014
Program: MBA
Southeast University

6087

(1+R)N2
Tk.
4,000

C3
+

(1+.15)2
+

3025

(1+R)N3
Tk.
5,000
(1+.15)3

] -

NCO

] -

Tk.
12,000

3288 ] - 12000

Here,
NCO=Net cash
outflow/Initial
Investment
C= Cash Flow
R=Interest
Rate/Discount Rate
N=Number of years

Page 2

= 399.11

So, the firm should choose Project B since it has a higher NPV than Project A has.
4. Calculating IRR Teddy Bear Planet, Inc., has a project with the following cash flows:
Year
Cash Flow (Tk.)
0
-11,000
1
5,500
2
4,000
3
3,000
The company evaluates all projects by applying the IRR rule. If the appropriate interest rate is 8 Percent,
should the company accept the project?
Sol.
C1
Net Present
Value (NPV)

C2

(1+R)1

Tk.5,500
=

+
(1+.08)1

= [ 5093
= Tk. -97

(1+R)2
Tk.
4,000

C3
+

(1+R)3
Tk.
3,000

(1+.08)2
+

3429

] -

NCO

] -

Tk.
11,000

(1+.08)3

2381 ] - 11000

Here,
NCO=Net cash
outflow/Initil
Investment
C= Cash Flow
R=Interest
Rate/Discount Rate
N=Number of years

Here, NPV is negatives, so the company reject the project.

If, the company decrease the interest in 6%,

Net Present
Value (NPV)

=
=

IRR

[
Tk. 268

A+

.06+

.06+

7.47%

C1
(1+R)1
Tk.5,500
(1+.06)1
5189

C
C-D
Tk. 268
Tk.268-(-Tk 97)
Tk. 268
Tk.268+Tk 97)

+
+
+

C2
+
(1+R)2
Tk. 4,000
+
(1+.06)2
3560
+

(B-A)
(.08-.06)
x0.02

C3
(1+R)3
Tk. 3,000
(1+.06)3

NCO

Tk. 11,000

2519 ]

Tk. 11000

Here,
A= Lower interest Rate
B= Higher interest rate
C= NPV of lower interest rate
D= NPV of higher interest rate

Here, IRR<8%, so the company reject the project.

Md. Jahidul Islam Khan

Id: 2014110014
Program: MBA
Southeast University

Page 3

5. Calculating Profitability Index Bill plans to open a self-serve grooming centre in a storefront. The
grooming equipment will cost $190,000, to be paid immediately. Bill expects after tax cash inflows
of $65,000 annually for seven years, after which he plans to scrap the equipment and retire to the
beaches of Nevis. The first cash inflow occurs at the end of the first year. Assume the required return
is 15 percent. What is the projects PI? Should it be accepted?
Sol.
The profitability index is defined as the PV of the cash inflows divided by the PV of the cash outflows.
The cash flows from this project are an annuity, so the equation for the profitability index is:
Here,
1
A{1}
N
PVA
=
A=Tk. 65000
(1+R)
R
R= 15% = 0.15
N= 5 Years
1
Tk. 65,000{1}
5
=
(1+.15)
0.15
Tk. 32,684
=
0.15
Tk. 217,890
=
Profitability
Index (PI)

=
=

Tk. 217,890
Tk. 190,000
1.15

Here, PI>1, so the company accept the project.

6. Stock Values The Starr Co. just paid a dividend of Tk.5.00 per share on its stock. The dividends are
expected to grow at a constant rate of 5 percent per year, indefinitely. If investors require a 12percent
return on the stock, what is the current price? What will the price be in three years? In 15 years?
Sol.
The constant dividend growth model is:
Pt =

Dt (1 + g)
(R g)

Here,
Pt=
Dt=
R=
g=

Price of stock
Estimated dividend for next year
Required rate of return
Growth rate

So, the price of the stock today is:

P0 =

D0 (1 + g)
(R g)
= Tk. 5 (1 + .05)

Md. Jahidul Islam Khan

Id: 2014110014
Program: MBA
Southeast University

Here,
P0= Tk. 5
D0= 1 years

Page 4

(.12 .05)

R= 12 % = 0.12
g= 5 % = 0.05

= Tk. 75

So, the stock price in 3 years will be:

FV=

Here,
Present Value (PV)= Tk. 75
R= 5 % = 0.05
N= 3 years
Future Value (FV)= ?

PV (1+R)N
= Tk. 75 (1+ .05)3
= Tk. 86.82

And, the stock price in 15 years will be:

Here,
Present Value (PV)= Tk. 76
R= 6 % = 0.05
N= 4 years
Future Value (FV)= ?

FV= PV (1+R)
= Tk. 75 (1+ .05)15
= Tk. 155.92

7. Yield on a Zero under Real-World Convention of Semi annually Compounding Suppose the EightInch Nails (EIN) Company issues a Tk. 1,000 face value, five years zero coupon bond. The initial
price is set Tk. 500. What is the yield to maturity using semi annual compounding?
Here,
FV= Tk. 1,000
PV= Tk. 500
N=5 years
R= ?
We know that,

=>
=>
=>
=>

FV

PV (1+R)N

Tk. 1,000
Tk. 1,000
Tk. 1,000
Tk. 1,000
Tk. 500

=
=
=

Tk. 500(1+R/2)Nx2
Tk. 500(1+R/2)5x2
Tk. 500(1+R/2)10
2+ R
)10
2
2+ R
)10/10
2
2+ R
2
1.07 x 2
2.14 -2
0.14
14%

(
(

=>

21/10

=>

1.07

=>
=>
=>
=>

2+ R
R
R
R

=
=
=
=

Ans: 14 % is the yield to maturity using semi annual compounding.

Md. Jahidul Islam Khan
Id: 2014110014
Program: MBA
Southeast University

Page 5