8/11/2019 Information to Be Added to Chapter 10

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Information to be added to Chapter 10 :

Dear students,

Question: The project A has initial cost of $42000 (put negative sign for initial cost as it iscash outflows at year 0), and generates $14000 from year 1 to year 5. Given r is 10%, what is

the Net present value (NPV) and Profitability index (PI)?

For HP user, the keytrokes are -42000 CFj, 14000 CFj, 5 [shift] Nj, 10 I/YR, [shift] [NPV]

NPV is $11071.01 (refer to slide 10.23, chapter 10 and amend the keystroke accordingly)

Note: [shift] is orange-colour button above the C button on HP calculator. Press 5 shift Nj

because $14000 recurs/ repeats for 5 years. Alternatively, you can press year-by-year.

To find profitability index, please press 0 CFj, 14000 CFj, 5 [shift] Nj, 10 I/YR, [SHIFT] [NPV]=53071 ($53071 is the summation of discounted future cash flow from year 1 to year 5).

Profitability index = summation of discounted future cash flows/ initial cost =

$53071/$42000 =1.26 (refer to slide 10.25, Chapter 10, lesson 2)

Please amend/add information to the slides. I apologize for the ambiguity of the slides as

these lecture slides are not originally prepared for HP10BII+.

Thank you.

Regards,

lee pei lin

8/11/2019 Information to Be Added to Chapter 10

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Tutorial 1 :

Dear students,

I would like to clarify about the calculation of before-tax cost of debt. For instance,

for Question P9-2, the net proceeds is $980, PMT= 120, FV=1000, N=15. (Pay attention tothe sign of PV, FV and PMT below)

The keystrokes are: 15N; -980PV; 1000 FV, 120 PMT, COMPUTE I/YR = 12.30%

or 15N; 980PV; -120PMT; -1000 FV; COMPUTE I/YR= 12.30%

Both are accepted. All in all, the cost of debt financing is 12.3%.

You can think in this way. The former one (with negative PV) is from the point of view of

bondholders (they buy a bond at a net price of $980 and receive a positive coupon payment

and face value (cash inflows, so positive) . The latter is from the perspective of bond issuer/

firm (the company receives net proceeds after flotation cost of $980, and pay coupon

payment and face value to bondholders (cash outflows so negative sign for coupon and

par).

The sign is only matter for financial calculator to recognize inflows and outflows. In other

words, the dollar value will not be negative in your pocket (the sign is only for

understanding of inflows and outflows). When you draw a timeline/ use formula to calculate

cost of debt, PV= Cx[1-1/(1+r)t/r] + F/ (1+r)t (r is the cost of debt), you can just ignore the signs for PV, C, and F

(present value, coupon and face value).

Hope this clarifies your doubts.

Thanks.

Lee Pei Ling