Assuming the required RoR for an Investment is 12% and using an inflation rate of 3%, would you recommend the investment?Investment at year 0 = $8.5 million, Net income at years 1-5 is $1.5 million for each year.
a bond has the following terms, Principal amount-$1000,Semi-annually $50, Maturity 10 Years, what is the bonds price if comparable debt yields 12%
To determine whether the investment is recommended or not, we need to calculate the net present value (NPV) of the investment.
To do that, we first need to discount the cash flows to their present value, using the discount rate, which is the required rate of return (RoR) adjusted for inflation. The formula to calculate the present value of the cash flows is:
PV = CF / (1 + r)^n
Where:
PV = Present Value
CF = Cash Flow
r = Discount Rate
n = Number of years
Given:
Required Rate of Return (RoR) = 12%
Inflation Rate = 3%
Year 0:
Investment = -$8.5 million (negative as it is an outflow)
Years 1-5:
Net Income = $1.5 million for each year
To calculate the discount rate, we need to adjust the required RoR for inflation:
Adjusted Discount Rate = (1 + RoR) / (1 + Inflation Rate) - 1
Adjusted Discount Rate = (1 + 12%) / (1 + 3%) - 1 = 8.74%
Now, let's calculate the present value of the cash flows:
PV(Investment at year 0) = -$8.5 million
PV(Net Income at years 1-5) = $1.5 million / (1 + 8.74%)^1 + $1.5 million / (1 + 8.74%)^2 + $1.5 million / (1 + 8.74%)^3 + $1.5 million / (1 + 8.74%)^4 + $1.5 million / (1 + 8.74%)^5
PV(Net Income at years 1-5) = $1.5 million / 1.0874^1 + $1.5 million / 1.0874^2 + $1.5 million / 1.0874^3 + $1.5 million / 1.0874^4 + $1.5 million / 1.0874^5
PV(Net Income at years 1-5) = $1.384 million + $1.275 million + $1.170 million + $1.070 million + $0.975 million
PV(Net Income at years 1-5) = $6.874 million
Now, let's calculate the NPV:
NPV = PV(Investment at year 0) + PV(Net Income at years 1-5)
NPV = -$8.5 million + $6.874 million
NPV = -$1.626 million
Since the NPV is negative (-$1.626 million), it indicates that the investment does not meet the required RoR of 12%. Therefore, based on the given assumptions, I would not recommend this investment.