W99NOONQ2.1
Use the following STRIP table to figure the NPV a project that has these cash flows:
STRIP Table:
| Maturity of STRIP | Bid Price |
Ask Price |
||
| August 1999 | 96:01 |
96:02 |
||
| February 2000 | 92:07 |
92:08 |
||
| August 2000 | 88:13 |
88:16 |
||
| February 2001 | 84:21 |
84:24 |
||
Cash flows:
Today |
February 2000 |
February 2001 |
||
-$10,000 |
+$70,000 |
+$10,000 |
||
Since we have cash flows coming in Feb 2000 and Feb 2001,we need to know what their PV’s are, or equivalently, what people are willing to pay today for cash flows in Feb 2000 and 2001. The STRIP table tells us exactly that. The price for $100 in Feb 2000 is 92:08 or 92 and 8/32 of a dollar: $92.25. Similarly, the price for $100 in Feb 2001 is 84:24 or $84.75. Thus, the price per dollar for money to be received in the future is $0.9525 for Feb 2000 and $0.8475 for Feb 2001. The NPV of the project is:
NPV=-10,000+70,000(0.9225)+10,000(0.8475)=$63,050.