Cash flow.....and geometric mean,....please help

[rohanbahl1]

1. Assuming a discount rate of 10%, an asset that generates cash flows of $20 in year one, $24 in year two, negative $15 in year three, and is sold for $225 at the end of year four has a present value of:
A. $261
B. $150
C. $180
D. Cannot be determined from the information provided above.
2. If an investment earns a return of 12% in the first year and 5% in the second year, loses 3% in the third year, and earns 8% in the first half of the fourth year, the geometric mean rate of return on an annual basis is nearest to:
A. 6.1%
B. 6.3%
C. 7.3%
D. 23.1%

 

[CAFicionado]

rohanbahl1 Wrote:
——————————————————-
> 1. Assuming a discount rate of 10%, an asset
> that generates cash flows of $20 in year one, $24
> in year two, negative $15 in year three, and is
> sold for $225 at the end of year four has a
> present value of:
>
> A. $261
> B. $150
> C. $180
> D. Cannot be determined from the information
> provided above.
C. $180
CFo = $0
C01 = $20
C02 = $24
C03 = -$15 (don’t forget negative)
C04 = $225
I = 10
NPV = $180
————————————————————————–
> 2. If an investment earns a return of 12% in the
> first year and 5% in the second year, loses 3% in
> the third year, and earns 8% in the first half of
> the fourth year, the geometric mean rate of return
> on an annual basis is nearest to:
>
> A. 6.1%
> B. 6.3%
> C. 7.3%
> D. 23.1%
A. 6.1%
[(1.12)(1.05)(0.97)(1.08)]^(1/3.5) = 1.0614
If that final return was N months, the decimal portion would be N/12.

 

[level1_dec]

1(c)
cash flow year 1 cash flow year 2 cash flow year 3 cash flow year 4
cash flow 20 24 -15 225
discount rate 1.1 1.2 1.331 1.4641
cash flow /discount rate 18.18 20 -11.261 153.6780275
18.18 + 20 +( -11.261 ) + 153.6780275 =180.5901236
2(d) ((1.12)*(1.05)*(0.97)*(1.08)-1)*100
(1.231978-1)*100= 23.1
rule is ((1+RM)*(1+RM(n+1))…-1.

 

[CAFicionado]

The question asked for the “geometric mean” and NOT the total amount it grows,
so you have to raise that to the 1/3.5.
I should have been more thorough: (1.0614 - 1) = 6.14%

 

[sumit_kansal]

I get 7.4
(1.12*1.05*.97*1.166)^1/4 - 1
I annualized 8 to 16.67 %.
Whats the correct answer??

 

[level1_dec]

i dont think so you can annualise , as it is an assumption . in the volatile or even normal stock markets it is difficult to assume retuns which could be the case with cash flows perhaps(on analysis bases). so on those ground ur answer is wrong . i think so 6.14% is more probable rather

 

[CFABLACKBELT]

rohanbahl1 Wrote:
——————————————————-
> 1. Assuming a discount rate of 10%, an asset
> that generates cash flows of $20 in year one, $24
> in year two, negative $15 in year three, and is
> sold for $225 at the end of year four has a
> present value of:
>
> A. $261
> B. $150
> C. $180
> D. Cannot be determined from the information
> provided above.
>
> 2. If an investment earns a return of 12% in the
> first year and 5% in the second year, loses 3% in
> the third year, and earns 8% in the first half of
> the fourth year, the geometric mean rate of return
> on an annual basis is nearest to:
>
> A. 6.1%
> B. 6.3%
> C. 7.3%
> D. 23.1%
You can do PV of each individually or just use the NPV function
CF0=0
CF1=20
CF2=24
CF3=-15
CF4=225
i=10
NPV=180
Second question:
(1.12*1.05*(1-.03)*1.08)^2/7 -1 = 6.14%

 

[level1_dec]

sumit ,
you need to look at question , even i missed on that, they have asked for annual bases not monthly bases hence 1/3.5 or 2/7 makes more sense