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Chapter 3

Problems
1)

a)

Method 1
PV
Interest
n

$ 12,000
9%
7

12000

13080

Method 2
$
Method 3

b)

$21,936.47

0
12,000 $

Method 1
n=
m=

7
4

$
Method 2
Method 3

c)

Reminder

Better--->

PV
n

$ 25,000
1
Better --->

1
12,270

22,374.54
$22,374.54

Equivalent Annual Yield "EAY" = (FV-PV)/PV


Method 1
Method 2
9.00%
9.00%

a)

2)

21,936.47

b)

9.31%

Alternative 1
m
i

12
7%

Alternative 2
m
i

1
8%

9.31%
9.00%

Method 1
3)

PMT
n
m
i

5000
12
2
8.50%

FV

Periods

Scenario 1
$
201,806

Scenario 2
$
210,382 13576.74095868
Note: he does not make a deposit at the end of the last p
Method 2
$201,805.67

$210,382.41

7)

PMT
n
IRR

2150
10
18%

Method 1

PV =

CF
9,662

0
0

PV

CF
11,401

2150
2150

Method 2
PVA

PMT
N
i
PV

2150
10
18%
9662.285534087

PVA

PMT
N
i
PV

2150
9
18%
9251.496930223
$11,401.50

Method 3

8)

FV
n
m
i

$ 45,000
6
4
18%

PV =

$9,662.29

PV =

$11,401.50

Method 1
PV=

15,647

Method 2
PV =

10)

Method 1

$15,647

-7000
7.92%

No, John should not pay for the lot at $7,000 beca
Method 2
a) PV
N
i

5783.15
10
10%

Since this is the present value discounted at 10% it is worth less t


NO

FV

15000

PV
N
i
FV

7000.00
10
7.92%
15000

This is the rate or return John would earn


This was found by using goal seek, but one could also just plug in

Method 3
pv =

13)

1) Method 1
i
m
vs.
m

7.92%

same as above, no John should not pay $7,000 for the lot because

13%
1
12

0
annual
monthly

$
$

24,991
24,522

1
5500
4867.256637168
$
4,833

Method 2
Price
$

0
1
24,990 $
(24,990)
5500
IRR -->
13.00%
Arrived at by goal seek changing the purchase price until the IRR equals 13%

14)

0
-24522
13.80%

1
0

EAY or IRR for 13% compounded monthly -->

13.80%

2
0

Method 1
i
wrong

1.50%
<- Periodic Rate
19.56%
1.5%
18%
0.0006708754

0
1
-100000
1500
-100000 1477.832512563

Solve for the Monthly Periodic Rate that makes the discounted cash flow equal to $
Method 2
Right
Wrong!!

19.56%
1.50%

18%

Goal Seek to bring sum to $0.00

18)
i

Method 1
10%
$
Method 2
10.00%

0.00

IRR Function

0
1
-13000
5000
-13000 4545.454545455

14257.2

15540.348 16938.98 18463.49

2
12,546 $

20125.2 21936.47

3
4
5
6
7
8
12,828 $ 13,117 $ 13,412 $ 13,714 $ 14,022 $ 14,338

0
(12,000)
0
(12,000)

26,807

1
0
1
0

2
0
2
0

3
0
3
0

4
0
4
0

5
0
5
0

<--Wrong!

FV

$26,807
0.072286

Method 1
Method 2
$
27,000
$27,000

FV

13023.25272 12492.3287464 11983.05 11494.53 11025.93 10576.43 10145.26

13023.25272 12492.3287464 11983.05 11494.53 11025.93 10576.43 10145.26


deposit at the end of the last period!!
Method 3

FVA Formula
$ 201,805.67

FVA = PMT * ((1+(i/m))^(n*m) 1)/ (i / m)

210,382.41

Note: The fomula needs to be adjusted for 1 more period of comounding

2150
2150
2150
2150
2150
2150
2150
1822.033898 1544.09652399 1308.556 1108.946 939.7848 796.4278 674.9388
2150
2150
2150
2150
2150
2150
2150
1822.033898 1544.09652399 1308.556 1108.946 939.7848 796.4278 674.9388

$9,662.29

2150

11401.5

y for the lot at $7,000 because it will result in a yield of less than the 10% he thinks he should earn.

ed at 10% it is worth less than the asking price, john should not pay the $7,000 asked.

one could also just plug in numbers and estimate the rate be seeing the PV change.

y $7,000 for the lot because it will yeild less that the 10% he thinks it should.

2
3
4
7500
9500
12500
5873.600125 6583.97654164 7666.484
$
5,791 $
6,446 $ 7,452

2
7500

3
9500

4
12500

4
0

5
0

til the IRR equals 13%


3
0

2
3
4
1500
1500
1500
1455.992623 1434.47549133 1413.276

6
0

7
0

5
6
1500
1500
1392.39 1371.813

ounted cash flow equal to $0, then express it as an annual rate.

8
0

9
0

7
8
1500
1500
1351.54 1331.567

2
1000
826.446281

3
4
5
6
0
5000
6000
863.65
0 3415.067 3725.528 487.5079

9
10
11
12
13
14
15
16
$ 14,661 $ 14,990 $ 15,328 $ 15,673 $ 16,025 $ 16,386 $ 16,754 $ 17,131

6
7
0 21936.47
6
7
0
0

8
0

9
0

10
0

11
0

12
0

13
0

10

11

12

13

14

15

9731.662 9334.928 8954.367 8589.321 8239.157 7903.268 7581.072 7272.012

9731.662 9334.928 8954.367 8589.321 8239.157 7903.268 7581.072 7272.012

or 1 more period of comounding without a last $5000 deposit.

hould earn.

10

2150
2150
2150
571.9821 484.7306 410.7886
2150
2150
571.9821 484.7306

10

15000

0
0

10
0

11
0

9
10
1500
1500
1311.888 1292.501

12
5500

13
0

14
0

15
0

16
0

17
0

11
12
13
14
15
16
1500
1500
1500
1500
1500
1500
1273.4 1254.581 1236.041 1217.774 1199.777 1182.047

17
18
19
20
21
22
23
24
$ 17,517 $ 17,911 $ 18,314 $ 18,726 $ 19,147 $ 19,578 $ 20,019 $ 20,469

14
0

15
0

16
0

17
0

18
0

19
0

20
0

21
0

16

17

18

19

20

21

22

23

6975.551 6691.176 6418.394 6156.733 5905.739 5664.978 5434.031

5212.5

6975.551 6691.176 6418.394 6156.733 5905.739 5664.978 5434.031

5212.5

18
0

19
0

20
0

21
0

22
0

23
0

24
7500

25
0

17
18
19
20
21
22
23
24
1500
1500
1500
1500
1500
1500
1500
1500
1164.578 1147.367 1130.411 1113.706 1097.247 1081.031 1065.056 1049.316

25
26
27
28
$ 20,930 $ 21,401 $ 21,882 $ 22,375

22
0

24

5000

23
0

24
0

25
0

26
0

27
0 $

28
22,374.54

26
0

27
0

28
0

29
0

30
0

31
0

32
0

33
0

34
0

25
26
27
28
29
30
31
32
33
1500
1500
1500
1500
1500
1500
1500
1500
1500
1033.809 1018.531 1003.479 988.6489 974.038 959.644 945.46172399 931.489 917.724

35
0

36
9500

37
0

38
0

39
0

40
0

41
0

42
0

43
0

44
0

34
35
36
37
38
39
40
41
42
43
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
904.161 890.799 877.635 864.665 851.886 839.297 826.893 814.673 802.634 790.772

45
0

46
0

47
0

48
12500

44
45
46
47
48
49
50
51
52
53
1500
1500
1500
1500
1500
1500
1500
1500
1500
1500
779.086 767.572 756.229 745.053 734.043 723.195 712.507 701.977 691.603 681.383

54
55
56
57
1500
1500
1500
1500
671.313 661.392 651.618 641.988

58
59
1500
1500
632.5 623.153

60
101500
41544

Chapter 3
years

4
1

3
2

2
3

Problem 5
$ 2,500.00
$ 3,528.95
Interest Rate

$
$

$
$

750.00
891.08

9%

Not Part of the Question, but what are these payments worth today given a 12% discount rate?
$

3,592

2,232

534

Problem 11
Years
8.14%

0
-100000

15000

15000

15000

No, this would not be an acceptble investment for Dallas Development


Not part of the question, but what if they viewed their IRR as compounded monthly?
8.14%
Err:523

-100000

Problem 15

9
Years
Interest
10%

Payment Formula

$ 3,137.27
$ 7,397.52

$ 3,137.27
$ 6,725.02

$ 3,137.27
$ 6,113.65

($3,137.27) Annual Compounding


($244.09) Monthly Payments
($2,929.04) Total Annual Payments

($0.0586)

Not the Question, but what if the payments are made annually, but the interest compounds mont
$ 3,067.09
$ 7,515.75

$ 3,067.09
$ 6,803.35

$ 3,067.09
$ 6,158.48

1
4

0
5

$ 1,300.00
$ 1,417.00

$ 5,837.03

ay given a 12% discount rate?


$

826

15000

10

15000

15000

15000

15000

15000

15000

mpounded monthly?
0

10

$ 3,137.27
$ 5,557.86

$ 3,137.27
$ 5,052.60

$ 3,137.27
$ 4,593.28

$ 3,137.27
$ 4,175.71

$ 3,137.27
$ 3,796.10

$ 3,137.27
$ 3,451.00

$ 3,137.27
$ 3,137.27

$ 3,067.09
$ 4,567.99

$ 3,067.09
$ 4,135.00

$ 3,067.09
$ 3,743.05

$ 3,067.09
$ 3,388.26

$ 3,067.09
$ 3,067.09

ut the interest compounds monthly?


$ 3,067.09
$ 5,574.73

$ 3,067.09
$ 5,046.31

11

12

50,000.00

50,000.00

15000

13

14

15

16

17

18

19

20

21

22

23

24

15000

25

26

27

28

29

30

31

32

33

34

35

36

15000

37

38

39

40

41

42

43

44

45

46

47

48

15000

49

50

51

52

53

54

55

56

57

58

59

60

15000

61

62

63

64

65

66

67

68

69

70

71

72

15000

73

74

75

76

77

78

79

80

81

82

83

84

15000

85

86

87

88

89

90

91

92

93

94

95

96

15000

97

98

99

100

101

102

103

104

105

106

107

108

15000

109

110

111

112

113

114

115

116

117

118

119

120

15000