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Question - • While we just demonstrated the differences...

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Question For the same consulting job (assuming you could earn 12%), would you rather have? 1. $29,000 paid in payments of $6,500 at the end of year one, $7,500 paid at the end of year two, and $15,000 paid at the end of year three. 2. $22,459.23 paid today. 1
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You Don’t Care…Here’s Why… 2 1. $22,459.23 2. $22,459.23 3. $31,553.60/(1.12)3 = $22,459.23 0 1 2 3 $6,500 $7,500 $15,000 r = .12 0 1 2 3 $22,459.23 r = .12 0 1 2 3 $31,553.60 r = .12 They have equivalent values.
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Multiple Cash Flows – FV You open an IRA with a $1,500 deposit today and plan to deposit $2,200, $2,600, and $3,000 at the same time for the next three years. How much will you have at the end of three years assuming an 8% discount rate? Remember, for a single cash flow… FV = PV(1 + r ) t . 3 0 1 2 3 $1,500 $2,200 $2,600 $3,000 r = .08
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Multiple Cash Flows – FV 4 You open an IRA with a $1,500 deposit today and plan to deposit $2,200, $2,600, and $3,000 at the same time for the next three years. How much will you have at the end of three years assuming an 8% discount rate?
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Key Point on Cash Flow Timing
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Unformatted text preview: • While we just demonstrated the differences between the timing of payments, from this point forward, assume that the first payment occurs one period from the present ( at the end of the each period ), unless specifically stated 5 One More Before We Move On • How much is the following investment worth? – A promised return of 11% and three, $5,000 payments beginning at the end of the fourth year and paid consecutively thereafter. • Draw the timeline and using your calculator, calculate: 6 Present Value 7 r = .11 $3,293.65 $2,673.20 $2,967.26 $8,934.11 0 1 2 3 4 5 6 $5,000 $5,000 $5,000 $5,000/(1.11)4 $5,000/(1.11)5 $5,000/(1.11)6 Future Value In Six Years 8 $6,160.50 $5,000.00 $5,550.00 $16,710.50 0 1 2 3 4 5 6 $5,000 $5,000 $5,000 $5,000(1.11)2 $5,000(1.11)1 $5,000 r = .11 Compare The Results • What’s the relationship between: – PV = $ 8,934.11 – FV = $16,710.50 • What is the FV of $8,934.11 in 6 years at 11%? 9...
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