Time value of money problem help

D

Devi09

New member
Joined
Mar 23, 2015
Messages
2
Hi, I need help with the second step of this problem: (please solve using financial calculator)

The Swell Computer Company has developed a new line of desktop computers. It is estimated that the cash returns generated by the new product line will be $800,000 per year for the next five years, and then $500,000 per year for 3 years after that (the cash returns occur at the end of each year). At a 9% interest rate, what is the present value of these cash returns?

So the 5yrs PV is: n=5 , i =9% PV=? FV= 0 PMT= 800,000 therefore PV= 3,111,721.01

The next 3 yrs however i don't know how to do. I thought it'd be the same process as the first step but it isn't. I've been told the answer is 822,575 but I don't know how to get there via the financial calculator.

Thanks
 
Your number for present value of 3 payments in amount of $500,000 starting at the end of 6th year do not look correct

I get this amount as present value $822,583.93

You did not mention the amount for payments after the first 8 payments thus unable to get the net present value of the full investment
 
Dexter may I ask how you got that PV number? As in your calculations?

Thanks
 
Hi Devi09

Present value of deferred ordinary annuity


\(\displaystyle PVA= 500,000 \times (1.09)^{-5} \times \frac{1-(1.09)^{-3}}{0.09}\)
\(\displaystyle PVA= 500,000 \times 0.64993138629834548405288188068363 \times \frac{1-0.77218348006106426960322896244022}{0.09}\)
\(\displaystyle PVA= 324965.69314917274202644094034182 \times \frac{0.22781651993893573039677103755978}{0.09}\)
\(\displaystyle PVA= 324965.69314917274202644094034182 \times 2.5312946659881747821863448617753\)
\(\displaystyle PVA= 822583.92569765091410066959622874\)


Present value of deferred annuity due


\(\displaystyle PVAD= 500,000 \times (1.09)^{-6} (1.09) \times \frac{1-(1.09)^{-3}}{0.09}\)
\(\displaystyle PVAD= 500,000 \times 0.59626732687921604041548796392994 (1.09) \times \frac{1-0.77218348006106426960322896244022}{0.09}\)
\(\displaystyle PVAD= 298133.66343960802020774398196497 \times (1.09) \times \frac{0.22781651993893573039677103755978}{0.09}\)
\(\displaystyle PVAD= 298133.66343960802020774398196497 \times 1.09 \times 2.5312946659881747821863448617753\)
\(\displaystyle PVAD= 298133.66343960802020774398196497 \times 2.7591111859271105125831158993351\)
\(\displaystyle PVAD= 822583.92569765091410066959622875\)
 
Last edited:
Denis said:
Ah ha! You're now displaying insignificant digits :confused:
Click to expand...

Sir Wilmer

I just recalculated the figures and it seems both amounts for PVA and PVAD match till the last insignificant digit of 4

So the odd insignificant digit of 5 in PVAD could have been a typo from my part
 
Denis said:
A typo?! Go stand in the corner for 15 minutes (2 significant digits).
Click to expand...

It's dark and cold at this corner

None of this fuss about significance or insignificance be around had I only showed the present value of ordinary annuity and annuity due to the nearest cent.
 
Hi Devi09

$822,583.93 is the present value of 3 payments in amount of $500,000 starting at the end of year 6 discounted at 9% p.a.

Doesn't matter if you use ordinary annuity or an annuity due, the present value is same nevertheless
 
You must log in or register to reply here.
Top