Which of the Following Is the Correct Equation to Solve

question 34

Multiple Choice

Which of the following is the correct equation to solve for the NPV of the project that has an initial outlay of $30,000, followed by three years of $20,000 in incremental cash inflow? Assume a discount rate of 10%.

• A) NPV = -30,000 + (3 × 20,000)/(1.10)3
• B) NPV = -$30,000 + $20,000/(1.10)1 + $20,000/(1.10)2 + $20,000/(1.10)3
• C) NPV = -$30,000 + $20,000/(1.01).10 + $20,000/(1.02).10 + $20,000/(1.03).10
• D) NPV = -$30,000 + $20,000/(1.1).10 + $20,000(1.2).10 + $20,000(1.3).10

---

Definitions:

Conversion Value

The monetary value of a convertible security if it is converted into a different asset, usually shares of the issuing company's stock.

Bond Value

This refers to the present value of a bond's future interest payments plus the face value of the bond when it matures, essentially the price at which a bond is traded.

Credit Default Swaps

Financial derivative contracts that transfer the credit exposure of fixed income products between parties, used as a form of insurance against default on loans or bonds.

Interest Rate Risk

Interest rate risk is the potential for investment losses due to fluctuations in interest rates, affecting the value of fixed-income securities inversely.