Present Value of an Ordinary Annuity (Lecture 2, Example 1)
National Agents Alliance (NAA) offers a mortgage payment insurance policy. If an insured
employee loses his job now, this policy will cover his monthly mortgage payments for the
Known Variables f
NPV Function
Session 3
Year
Undiscounted CFs
Discount Rate
Approach 1: Discounting
Discounted CFs
NPV = sum of disc. CFs
Approach 2: Formula
NPV of CFs in years 1-3
CF in year 0
NPV for the project
0
-300
10%
1
100
2
150
3
200
-300.00
90.91
123.97
150.26
Month
Actors Salary
1
2
3
Movie Revenue
Discount Rate
Actor Salary Growth
Decrease in Revenue
Periodic Rate
PV of Inflows
24%
1%
10%
2%
$96,911,461.27 USING EXCEL
$96,911,461.27 USING FORMULA
Discount back to year (25000000*(1/0.12-1/0.12*(0.9/1.02)^5)/1.
Comprehensive Cash Flow Problem
Problem
You are evaluating an investment project in the production of shampoo at a consumer products factory that you
purchasing new equipment for $3,400,000 and preparing it for operation, which costs another $60,000. The
CASE WRITE-UP: PIONEER PETROLEUM
1)
Cost of Equity: Pioneer decided to use current earnings yield on the stock as the
cost of both new equity and retained earnings. Advocates pointed out that no
dilution of earnings per share would occur if the company ea