4 points
(NB A financial calculator must be used to answer this question)
A business venture requires an initial investment of R150 000 and has an expected quarterly cash flow as follows:
Quarters 1
3
4
5
Cash
20 000
30 000
50 000
72 500
Flow
An investor will consider this option if she can get a return of 14% p.a. compounded quarterly. Which one of the following alternatives is FALSE?
(Answers are rounded to two decimal places where necessary)
NPV = -150 000 + 20 000(1, 035)$^{-1}$ + 30 000(1, 035)$^{-3}$ + 50 000(1, 035)$^{-4}$ + 72 500(1, 035)$^{-5}$
IRR = 14,75% p.a. effective.
NPV = R997,12
If Newton's method is used to calculate the IRR, then the iterative formula that must be used is
$i_{n+1} = i_n - \frac{-150000 + 20000(1 + i_n)^{-1} + 30000(1 + i_n)^{-3} + 50000(1 + i_n)^{-4} + 72500(1 + i_n)^{-5}}{-20000(1 + i_n)^{-2} - 90000(1 + i_n)^{-4} - 200000(1 + i_n)^{-5} - 362500(1 + i_n)^{-6}}$
0 = -150 000 + 20 000(1, 0367...) + 30 000(1, 0367...) + 50 000(1, 0367...) + 72 500(1, 0367...)
