322.1
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 2019 | 96.01 |
96.02 |
||
| February 2020 | 92.22 |
92.25 |
||
| August 2020 | 88.13 |
88.16 |
||
| February 2021 | 84.65 |
84.75 |
||
Cash flows:
Today |
February 2020 |
February 2021 |
||
-$10,000 |
+$70,000 |
+$10,000 |
||
Since we have cash flows coming in Feb 2020 and Feb 2021,we need to know what their PV’s are, or equivalently, what people are willing to pay today for cash flows in Feb 2020 and 2021. The STRIP table tells us exactly that. The price for $100 in Feb 2020 is $92.25. Similarly, the price for $100 in Feb 2021 is $84.75. Thus, the price per dollar for money to be received in the future is $0.9525 for Feb 2020 and $0.8475 for Feb 2021. The NPV of the project is:
NPV=-10,000+70,000(0.9225)+10,000(0.8475)=$63,050.