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Unformatted text preview: e annual payments of $25,000
each beginning in 40 years. How much
would you be willing to invest today if you
desire an interest rate of 12%? Saving For Retirement Timeline
012 … 39 40 41 42 000 … 0 25K 25K 25K 43 44 25K 25K Notice that the year 0 cash flow = 0 (CF0 = 0)
The cash flows years 1 – 39 are 0 (C01 = 0; F01 = 39)
The cash flows years 40 – 44 are 25,000 (C02 = 25,000;
F02 = 5) Saving For Retirement continued
• Calculator Approach
• Use cash flow keys:
• CF0 = 0
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•
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• C01 = 0; F01 = 39
C02 = 25000; F02 = 5
I = 12
CPT NPV = 1084.71 Workshop #5
• Consider the following cash flows:
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•
•
• Year 1 CF = $100
Years 2 and 3 CFs = $200
Years 4 and 5 CFs = $300
The required discount rate is 7% a) What is the value of the cash flows today?
b) What is the value of the cash flows at year 5?
c) What is the value of the cash flows at year 3? Answer to Workshop #5
a) Find the present value of the cash flows. Calculator input:
• CF0 = 0; C01 = 100; F01 = 1; C02 = 200; F02 = 2; C03 = 300; F03 = 2; I = 7; CPT NPV =
874.17 a) To calculate the value in year 5, use the present value from part (a) and calculate the
future value: PV = 874.17; N = 5; I/Y = 7; CPT FV = 1226.07
b) Similar for the value in year 3: PV = 874.17; N = 3; I/Y = 7; CPT FV = 1070.90
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• Using formulas and one CF at a time:
Year 1 CF: FV5 = 100(1.07)4 = 131.08; PV0 = 100 / 1.07 = 93.46; FV3 = 100(1.07)2 =
114.49
Year 2 CF: FV5 = 200(1.07)3 = 245.01; PV0 = 200 / (1.07)2 = 174.69; FV3 = 200(1.07) =
214
Year 3 CF: FV5 = 200(1.07)2 = 228.98; PV0 = 200 / (1.07)3 = 163.26; FV3 = 200
Year 4 CF: FV5 = 300(1.07) = 321; PV0 = 300 / (1.07)4 = 228.87; PV3 = 300 / 1.07 =
280.37
Year 5 CF: FV5 = 300; PV0 = 300 / (1.07)5 = 213.90; PV3 = 300 / (1.07)2 = 262.03
Value at year 5 = 131.08 + 245.01 + 228.98 + 321 + 300 = 1226.07
Present value today = 93.46 + 174.69 + 163.26 + 228.87 + 213.90 = 874.18
(difference due to rounding)
Value at year 3 = 114.49 + 214 + 200 + 280.37 + 262.03 = 1070.89 Annui...
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 Fall '14

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