It is important to note that the influence of using highly specialized quantitative techniques is on an increasing trend mainly due to its ability to provide inferential statistics. The results are inferred in a highly précised and accurate manner, which lead the quantitative analysts to sort out the different aspects attached with the behavior of a financial decision. This report highlights various kinds of scenarios in which the specialized quantitative techniques are applied in order to sort out the behavior of the financial decision taken under that scenario. Specialized techniques such as regression, correlation, NPV, IRR, yield to maturity, annuity, etc are utilized to analyze the different scenarios.
Net Present Value
This question inquires about the viability of an investment opportunity such that the opportunity requires $10,000 to be invested today. The cash inflows from this opportunity will be derived in such a way that $500 will be received after one year, $1,500 after two years and $10,000 after ten years. With reference to the particular technique of Net Present Value (NPV), the viability of this opportunity is asked whether the opportunity is attractive if interest rates are 6% and 2% respectively.
Theoretical Background Net Present Value (NPV) is the technique, which mainly works on the concepts of time value of money. According to time value of money, the money received in future time does not have the same worth, had that money received today (Brigham et al, 2010 pp. 380-81). If that future money is brought back today, it would have lesser worth. NPV is the technique that works on the basis of cash flows such that the initial investment is deducted from the discounted cash flows. The resulting answer provides the estimated amount of benefit earned or loss incurred in case of opting the investment opportunity. In case if the NPV is found to be positive, it means, that the investment opportunity is financially viable and hence should be accepted. In case of negative NPV, the investment opportunity is not up-to-the-mark and it should be rejected. Computation Years 0 1 2 10 Investment (10,000) Cash Inflows 500 1,500 10,000 Discount Factor (6%) 1.0000 0.9434 0.8900 0.5584 Discounted Cash Flows (10,000) 471.70 1,334.99 5,583.95 NPV (2,609.36) Years 0 1 2 10 Investment (10,000) Cash Inflows 500 1,500 10,000 Discount Factor (2%) 1.0000 0.9804 0.9612 0.8203 Discounted Cash Flows (10,000) 490.20 1,441.75 8,203.48 NPV 135.43 Interpretation From the above stated results, it can be observed that if the interest rate is set to be 6% to discount the later coming cash inflows, it would result in negative NPV of $2,609.36. Since the negative NPV states that the investment opportunity is not attractive enough to be accepted, therefore it should be rejected. On the other hand, if the interest rate is trimmed to only 2%, it will generate positive NPV of $135 from the same cash flows. This positive NPV reflect that the investment opportunity is financially viable and it should be accepted. Question 2 Present Value Annuity Background Information This question pertains to annuity such that a house is to be purchased on mortgage basis. The actual cost of house is $350,000. However, the buyer is willing to pay $50,000 as down payment. For the rest of $300,000 the buyer wants to pay the amount along with the interest payments in next 30 years at 7% interest per annum. The buyer wishes to pay loan in 30 equal installments, which should include principal amount