4-3

(1)
1
PV 1,552.90
1,552.90(0.321973 ) 499.99
10
1.12

Using a financial calculator, enter N = 10, I/Y= 12, and FV = 1,552.90; compute PV =
-499.99
(2)
1
PV = ?
PV 1,552.90
1,552.90(0.558395 ) 867.13
10
1.06

1,552.90

Using a financial calculator, enter N = 10, I/Y= 6, and FV = 1,552.90; compute PV =

-867.13

4-4

7%

PV = -200

n=?
400

Using a financial calculator, enter I/Y= 7, PV = -200, and FV = 400; compute N =

10.24 10 years
If I/Y= 18%, N = 4.19 4 years

0
4-5

r=14

1,000
PV = ?

6
FV = ?
2,000

Using a calculator, enter N = 6, I/Y= 14, PMT = 0, and PV = 1,000; compute FV =

2,194.97
PV = 1,000(1.14)6 = 1,000(2.19497) = 2,194.97
$1,000 today is worth more. The future value of $1,000 at 14 percent over six years is
$2,194.97, which is greater than the future $2,000.00.
Alternatively, using a calculator, enter N = 6, I/Y= 14, PMT = 0, and FV = 2,000;
compute PV = 911.17
PV = 2,000(1/1.14)6 = 2,000(0.455689) = $911.17
$1,000 today is worth more. The present value of $2,000 at 14 percent over six years
is $911.17, which is less than $1,000.00.

0
4-6

r=?

a.

12
1
FV PV
n
(1 r )
1
12 6
5
(1 r )
12
r
6

1 0.1487 14.87%

Using a calculator, enter N = 5, PV = -6, PMT = 0, and FV = 12; compute I/Y=

14.87% 15%.

4-7

The general formula for computing the future value of an ordinary annuity is:
(1 + r )n - 1
FVA n = PMT

10%

a.

400

400

400 400

400

400

FVA10 = ?
(1.10 )10 - 1
=
400
FVA10

400(15.93742 ) 6,374.97
0.10

Using a financial calculator, enter N = 10, I/Y= 10, and PMT = -400; compute
FV = 6,374.97

5% 1

200

200

b.
200

200

200

FVA5 = ?
(1.05 )5 - 1
FVA 5 = 200
200(5.52563) 1,105.13
0.05

Using a financial calculator, enter N = 5, I/Y= 5, and PMT = -200; compute FV =

1,105.13

0
4-14

12%

5 years

a.
PV = ?

-500

PV = 500/(1.12)5 = 500(0.56743) = 283.71

Using a financial calculator, enter N = 5, I/Y= 12, and FV = -500; compute PV =
283.71

6%

5 years

10 six-month

periods
b.
PV = ?

-500

FV = 500/(1.06)10 = 500(0.55839) = 279.20

Using a financial calculator, enter N = 10, I/Y= 6, and FV = -500; compute PV =
279.20

0 3%

12

16

5 years
20 quarters

c.
PV = ?

-500

FV = 500/(1.03)20 = 500(0.55368) = 276.84

Using a financial calculator, enter N = 20, I/Y= 3, and FV = -500; compute PV =
276.84

0
d.
PV = ?

5 years

12

24

36

38

60 months

PV = 500

125
1 + 0.12

12

500

500 (0.55045 ) 275 .22

Using a financial calculator, enter N = 60, I/Y= 1, and FV = -500; compute PV =

275.22

r = 7%
4-17

a.
10,000

10,000

10,000

10,000

1
1 (1.07

)4
10,000(3.38721) 33,872.11
PVA 10,000
0.07

Using a calculator, enter N = 4, I/Y= 7, PMT = 10,000, and FV = 0; compute PV

= -33,872.11.
b.

(1)

At this point, we have a three-year $10,000 annuity at 7 percent. Input N =

3 to override the number of years from part a in your calculators TVM
register, and you will find PV = 26,243.16.
You can also think of the problem as follows:
$33,872.11(1.07) $10,000 = $26,243.16
Or,
1
1 (1.07

)3

10,000(2.624316 ) 26,243.16
PVA 10,000
0.07

(2)

Zero after the last withdrawal.

9-12
Pulley System:
1
1 (1.14

)5

$17,100 $5,100(3.43308 )
NPV $17,100 $5,100
0.14

$17,100 $17,508.71 $408.71

The Pulley System project is acceptable.
Financial calculator: Input the appropriate cash flows into the cash flow register,
input I = 14, and then solve for NPV = $408.71.
IRR 15%.

(Accept)

Financial calculator: Input the appropriate cash flows into the cash flow register and
then solve for IRR = 14.99% 15%.

Cost

TV
(1 MIRR ) n

17,100

MIRR

Pulley

(1.14 ) 5 1
5,100

0.14
(1 MIRR ) 5

33,711 .53 5

1.0 0.145 14 .5%

17,100

33,711 .53

PV of CF

Year

Expected CF

0
1
2
3
4
5

r = 14%

$(17,100)$(17,100)
5,100
5,100
5,100
5,100
5,100

$(17,100)
4,474
3,924
3,442
3,020
2,649

Cumulative PV of CF
(12,626)
( 8,702)
( 5,260)
( 2,240)
409

DPBPulley = 4 + 2,240/2,649 = 4.85 years

PBPulley = $17,100/$5,100 = 3.35 years

Truck:
1
1 (1.14

)5
$22,430 $7,500(3.43308 )
NPV $22,430 $7,500
0.14

$22,430 $25,748.10 $3,318.10

The Truck Project is acceptable.
Financial calculator: Input the appropriate cash flows into the cash flow register,
input I = 14, and then solve for NPV = $3,318.10.
IRR = 20%. (Accept)
Financial calculator: Input the appropriate cash flows into the cash flow register and
then solve for IRR = 20%.

Cost

TV
(1 MIRR ) n

22,430

MIRR

Truck

(1.14 ) 5 1
7,500

0.14
(1 MIRR ) 5

49,576 5

1.0 0.172 17 .2%

22,430

49,575 .78

PV of CF

Year
0
1
2
3
4
5

Expected CF

r = 14%

$(22,430)$(22,430)
7,500
7,500
7,500
7,500
7,500

Cumulative PV of CF

$(22,430)
6,579
5,771
5,062
4,441
3,895

(15,851)
(10,080)
( 5,018)
(
577)
3,318

DPBTruck = 4 + 577/3,895 = 4.15 years

PBTruck = $22,430/$7,500 = 2.99 3 years

9-16
NPVC $14,000

$8,000 $6,000 $2,000 $3,000

(1.12)1 (1.12) 2 (1.12) 3 (1.12) 4

$14,000 $8,000 (0.89286 ) $6,000 (0.79719 )

$2,000 (0.71178 ) $3,000 (0.63552 )

 $14,000 $7,142 .88 $4,783 .14 $1,423 .56 $1,906 .56

$14,000 $15,256 .14
$1,256 .14

Calculator solution: NPVC = $1,256.14

IRRC = 17.3%

1
1 (1.12

)4
$22,840 $8,000 (3.03735 ) $1,458 .80
NPVR $22,840 $8,000
0.12

Calculator solution: NPVR = $1,458.79

IRRR = 15.0%
NPVR > NPVC, so Project R should be accepted.

PV of CF Using the Firms

9-8

Year

Expected CF

Required Rate of Return, r

Cumulative CF

Cumulative

PV of CF
0
1
2
3
4

$(10,000)$(10,000)
6,000
3,000
1,000
5,000

$(10,000)
5,455
2,479
751
3,415

$(10,000)
(4,000)
(1,000)
0
5,000

( 4,545)
( 2,066)
( 1,315)
2,100

PBTraditional = 3.0
PB Discount 3

1,315
3.39 years
3,415

9-11

NPVQ 4,000

5,000
4,000 5,000(0.826446 ) 132.23
(1.10) 2

Calculator solution: CF0 = -4,000, CF1 = 0 CF2 = 5,000, I = 10; compute NPVQ =
132.23
IRRQ = 11.80

NPVR 4,000

3,500
1,100

4,000 3,500(0.909091) 1,100(0.826446 ) 90.91

1
(1.10)
(1.10) 2

Calculator solution: CF0 = -4,000, CF1 = 3,500 CF2 = 1,100, I = 10; compute NPVR =
90.91
IRRR = 12.04%
Project Q should be purchases because it has the higher NPV.