Present Value and Capital Budgeting

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Present Value and Capital Budgeting

TUI University

FIN301-Principles of Finance

December 26, 2011
Abstract
In this paper I will calculate the present value of income from a gold mine.

Present Value and Capital Budgeting

Part I

A. Suppose your bank account will be worth \$15,000.00 in one year. The interest rate (Discounted Rate) that the bank pays is 7%. is the present value of your bank account ? What would the present value of the account be if the discount rate is only 4%?
NPV at 7%
\$15,000/1.07=\$14,018.69
NPV at 4%
\$15,000/1.07=\$14,423.08

B. Suppose you have two bank accounts, one called Account A and another Account B. Account A will be worth \$6,500.00 in one year. Account B will be worth \$12,600.00 in two years. Both accounts earn 6% interest. What is the present value of each of these accounts?
Account A NPV
\$6,500.00/1 year = \$6,132.08
Account B NPV
\$12,600/2 year =\$11,213.96

C. Suppose you just inherited an gold mine. This gold mine is believed to have three year worth of gold deposits.

Here is how much income this gold mine is projected to bring you each year for the next three years.
Year 1: \$49,000,000
Year 2: \$61,000,000
Year 3: \$85,000,000
Compute the present value of this stream of income at a discount rate of 7%. Remember, you are calculating the present value for a whole stream of income i.e. the total value of receiving all three payments (how much you would pay right now to receive these three payments in the future). Your answer should be one number – the present value for this gold mine at a 7% discount rate but you have to show how you got this number.
7% discount rate
\$49,000,000/(1.07) + \$61,000,000/(1.07)2 + \$85,000,000/(1.07)3= \$168,459,474.48
Now compute the present value of the stream income from the gold mine at a discount rate of 5% , and at discount rate...

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