3011_Wk_5_Financial_Math_Class - We are into compounding as...

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FGCU Prof. Jim Vail ISM 3011 Fall 2008 Financial Math Class This paper will help you do the Week 5 assignment, Project 13 on p.541. See Week 3’s instructions for accessing the AYK13_Data.xlsx file. Be sure to re-name and save the file before working with it. The project asks you to figure out how long it will take GoodGrow to break even, given revenue and expenses growth rates for three scenarios – worst case, expected case, and best case. The trick is to get the formulas right. To understand the math, consider this example. A company has $100,000 revenue in Year 1. What will be its revenue in Year 3 if it grows at 20% per year? Think as follows: Revenue in Year 2 will be $100,000 x 1.2 = $120,000. Revenue in Year 3 will be $120,000 x 1.2 = $144,000 . It is a mistake to calculate Year 3 as $100,000 x 1.2 x 2 = $240,000! It is also a mistake to calculate Year 3 as $100,000 x 1.4 = $140,000!
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Unformatted text preview: We are into compounding , as in figuring compound interest on a bank deposit. That means we have to use algebraic powers, as in squares and cubes. The Excel formula for squaring the number in cell A1 is =A1^2. (The caret is on the Shift-6 key.) To get started, put any single-digit number in the Years cell (C12) for the Worst Case. Then, the formula for Expected Revenue is =C6*((1+C8)^C12) . Think about what this formula is doing, and why it is correct. Then enter the formula for Expected Expenses. Finally, the formula for Total Profit is a simple difference, Revenue minus Expenses. Now, change the number of Years, trial and error, until you find the first time the company is in the black, expressed as number of years to one decimal place – e.g., 2.5. Repeat for the other two cases. -------Check total: In the Expected Case, GoodGrow will break even in 2.7 years....
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