FMtest_2[1] - Financial Management Test 2 Leah Chapter 5 Discounted Cash Flow Value Finding the FV of an OA rate is 7 What is the value of the cash

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Financial Management - Test 2 – Leah Chapter 5 –Discounted Cash Flow Value Finding the FV of an OA Deposit(d)= 4000, Rate(r)=8%, number of years(t)=3 or 4, account balance at beginning= 7000 Formula : today FV=7000(1+r)^3 Year 1: FV= d(1+r)^2, Year 2: FV=d(1+r), Year 3: value=4000. Answer= today + year 1 + year 2 + year 3 You invest $500 today and $600 in 1 yr. Pays 9% annually, how much will you have in 5 yrs? FV = 500(1.09) 5 + 600(1.09) 4 = $1616.26 You deposit $100 in 1 yr & $300 in 3 yrs. Pays 8% annually, how much will be in the acct in 5 yrs? FV = 100(1.08) 4 + 300(1.08) 2 = 136.05 + 349.92 = $485.97 Time Line: A n investment that will pay you 200 in 1 yr, 400 in 2 yrs, 600 in 3 yrs, & 800 in 4yrs. If you want to earn 10% per yr, how much would you be willing to pay? Year 1 CF: 200 / (1.12)1 = 178.57, Year 2 CF: 400 / (1.12)2 = 318.88 , Year 3 CF: 600 / (1.12)3 = 427.07 , Year 4 CF: 800 / (1.12)4 = 508.41 Total PV = 178.57 + 318.88 + 427.07 + 508.41=$1432.93 PV=FV(1+r)^t Time Line: Year 1 CF = $100; Years 2 and 3 CFs = $200; Years 4 and 5 CFs = $300. The required discount rate is 7%. What is the value of the cash flows at yr 5? FV 5 = 100x1.07 4 + 200x1.07 3 + 200x1.07 2 + 300x1.07 + 300= $1226.07 What is the value of the cash flows today? PV=100/1.07 + 200/1.07 2 + 200/1.07 3 + 300/1.07 4 + 300/1.07 5 = $874.17 Annuity – finite series of equal payments that occur at regular intervals -If the first payment occurs at the end of the period, it is called an ordinary annuity -If the first payment occurs at the beginning of the period, it is called an annuity due Perpetuity – infinite series of equal payments Perpetuity: PV = C / r Borrow money TODAY & you can afford a 632.00/month payment which you would like to extend 4 years. What can you borrow at 12% annualized interest? Loan or PV= C(1-1/(1+r) t ) /r $632(1 – 1/(1+.01) 48 ) / .01 = $23999.54 Annual salary of $36,000 & the bank is willing to allow your monthly mortgage payment to = 28% of your monthly income. max month pmt or C= ($36000/12) x.28= $840.00 -- interest rate on the loan is 6% per year with for a 30-year fixed rate loan. Loan amount= 840(1 – 1/1.005 360 )/ .005 $140,105 You know the payment amount for a loan and you want to know how much was borrowed. Do you compute PV or FV? Answer= PV Receive 5,000 per month for 25 years. you can earn .75% per month following retirement. What is the needed PV? PV = C(1 – 1/(1+r)t)/r $5000(1 – 1/(1.0075)300)/.0075 =$595,808 To compute payment amount: C = PV/[(1 – (1/(1+r)t))/r] put $1,000 on credit card. make the minimum pmt of $20 per mon. interest rate =1.5% How long will you need to pay off the $1,000. T = [ln(C)-ln(C-r(PV))]/ln(1+r)= [ln(20)-ln(20-.015(1000))]/ln(1.015)= 93.11 Finding the Rate w/o a Financial Calculator (trial and error process) Get starting point by calculating table value from PV/C Choose appropriate interest ratebased on that calculation and compute PV of the payments based
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This note was uploaded on 11/29/2010 for the course ACC 331 taught by Professor Dr.lee during the Fall '10 term at Jefferson College.

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FMtest_2[1] - Financial Management Test 2 Leah Chapter 5 Discounted Cash Flow Value Finding the FV of an OA rate is 7 What is the value of the cash

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