WHAT IS THE NPV CALCULATION FOR PROBLEM BELOW:During the Carter admini

QUESTION

WHAT IS THE NPV CALCULATION FOR PROBLEM BELOW:During the Carter administration, long-term US Treasury yields exceeded 15%, and short-term T-Bills yielded near 20%. After Reagans inauguration, interest rates began to fall as Fed Chairman Volckers restrictive monetary policy succeeded in containing ¦
Raising interest rates next year would have the following effects on each of these listed items: (1) Consumer financing for big-ticket items such as autos and homes would be more difficult to obtain, since the higher interest rates would make monthly payments higher over the extended period of long-term home mortgages or auto loans. (2) the present and future values of annuities would have increases because interest rates, when raised, would allow the investors who work for the annuity companies to make greater dividends and gains on the principal invested on behalf of the annuitant and beneficiaries. Then, when the annuity was paid out, the payments would be greater than if interest rates were not raised. (3) the NPV calculation would result in a lower net present value, because the result of the NPV formula would decrease as the interest rate (r) increased. Also, since an increase in the interest rate would¦

ult naturally in inflation, the present value would decrease. (4) the WACC (weighted average cost of capital) would increase because higher interest rates would increase the expectations of investors who would demand greater returns on their investments in a company. Also, this increase would result from the WACC formula in which higher required rate of return (r) causes a higher WACC. (5) corporate earnings would have to increase for reasons similar to the WACC because investors would expect higher rates of return on investments (ROI). Corporations would have to increase their earnings to pay higher dividends.

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