1.
Consider the Lichu Hadiya Farmers’ cooperative Union requires an investment of 200
million initially with subsequent cash flows of 50 million, 60 million, 75 million and 40
million. We characterize the project with the following end of year cash flows.
Period cash flow (million)
0 -200
1 50
2 60
3 75
4 40
Required
A, calculate NPV
B, compute profitability index
2. Assume Mr Kassa Asole proprietor deposited birr 2200 on January 1, 2001 for 5 years
with interest rate 8% at NIB international bank compounding annually. If he will not
withdraw the interest. What will be his future values of money at end of each year?
3. Assume ABC company invested birr 2,500,000 at Elfora Agro Industry in January1,2022
and at end dec,31,2022. The value of the investment is birr 3,125,000.
Required
A, compute the ABC company holding period return (HPR)
B, compute the ABC company holding period yield (HPY)
1. To calculate the NPV, we need to discount the cash flows back to present value using an
appropriate discount rate. Let's assume a discount rate of 10%.
NPV = (-200) + 50/(1+0.10) + 60/(1+0.10)^2 + 75/(1+0.10)^3 + 40/(1+0.10)^4
NPV = -200 + 45.45 + 49.59 + 57.31 + 27.38
NPV = -20.27 million
Therefore, the NPV of the project is approximately -20.27 million.
2. Profitability Index is calculated as the ratio of the present value of future cash flows to the
initial investment.
Profitability Index = (50 + 60 + 75 + 40) / 200
Profitability Index = 225 / 200
Profitability Index = 1.125
Therefore, the Profitability Index of the project is 1.125.
3. To calculate the future values of Mr Kassa Asole's deposit at the end of each year, we can
use the compound interest formula:
Future Value = Principal * (1 + Interest Rate)^Number of Years
Year 1: Future Value = 2200 * (1 + 0.08)^1 = 2376
Year 2: Future Value = 2200 * (1 + 0.08)^2 = 2561.28
Year 3: Future Value = 2200 * (1 + 0.08)^3 = 2768.66
Year 4: Future Value = 2200 * (1 + 0.08)^4 = 2999.02
Year 5: Future Value = 2200 * (1 + 0.08)^5 = 3253.24
Therefore, at the end of each year, the future values of Mr Kassa Asole's deposit would be
approximately:
Year 1: Birr 2376
Year 2: Birr 2561.28
Year 3: Birr 2768.66
Year 4: Birr 2999.02
Year 5: Birr 3253.24
4. A.
Holding Period Return (HPR) is calculated as:
HPR = (Ending Value - Beginning Value) / Beginning Value
HPR = (3,125,000 - 2,500,000) / 2,500,000
HPR = 625,000 / 2,500,000
HPR = 0.25 or 25%
Therefore, the ABC company's Holding Period Return is 25%.
B.
Holding Period Yield (HPY) can be calculated using the formula:
HPY = (Ending Value - Beginning Value + Income) / Beginning Value
Given that there was no additional income mentioned in the question, we can consider it
as zero.
HPY = (3,125,000 - 2,500,000 + 0) / 2,500,000
HPY = 625,000 / 2,500,000
HPY = 0.25 or 25%
Therefore, the ABC Company’s Holding Period Yield is also 25%.
5. Many investments have two components of their measurable return. Explain their
two components
The two components of a measurable return on an investment are:
1. Capital Gain/Loss: Capital gain or loss is the difference between the selling price of an
investment and its purchase price. It represents the change in the market value of the
investment over time. If the selling price is higher than the purchase price, it results in a
capital gain. Conversely, if the selling price is lower than the purchase price, it leads to a
capital loss. Capital gain/loss is a key component of the total return on an investment and
is realized when the investment is sold.
2. Income: Income from an investment refers to any cash flows generated by the
investment during the holding period. This can include interest payments, dividends,
rental income, or other forms of income received from the investment. Income provides a
regular stream of cash flow to the investor and contributes to the overall return on the
investment. Income can be reinvested back into the investment or used for other purposes
by the investor.
Both capital gain/loss and income are important components of the total return on an
investment and can have a significant impact on the overall performance and profitability
of the investment. Investors often consider both components when evaluating the success
of their investment decisions and assessing the risk and return profile of their investment
portfolio.
