i Craig:
I am already having trouble understanding Chapter 6, problem 2 on page 207 of textbook. I am currently on week 3 of the FIN 200 class. The problem reads as follows:
If you require a 9 percent return on your investments, which would you prefer?
a. $5,000 today
b. $15,000 five years from today
c. $1,000 per year for 15 years
Please help or give me some guidance. Thank you.
b) present value = 15000(1.09)^-5
= ....
c) present value = 1000[1 - 1.09)^-15]/.09
= .... (assuming payments made at the end of the year)
Hi Reba,
I am taking the same course as you are but only in week 1, I wanted to ask you for help with the statement of cash flow, did you understand how to accomplish this? I am very confused ... maybe you can help me.
thank you,
southern belle
We expect that we can receive annual incremental income after taxes of $15,000 which includes an adjustment for uncollectible accounts. What is the maximum commitment to A/R we should be willing to assume if our firm's minimum required after-tax return is 12%?
Sure, I'd be happy to help you with this problem.
To determine which option is the most preferable, we need to calculate the present value of each option and choose the one with the highest present value. The present value represents the current worth of future cash flows, taking into account the time value of money (the idea that money today is worth more than the same amount in the future).
Before we proceed, it's important to understand how to calculate the present value of future cash flows using a discount rate. The discount rate, in this case, is the required rate of return, which is given as 9 percent.
The formula to calculate the present value of a future cash flow is:
Present Value = Future Value / (1 + r)^n
Where:
- Present Value is the current worth
- Future Value is the value of the cash flow in the future
- r is the discount rate (required rate of return)
- n is the number of periods (years in this case)
Now let's calculate the present value of each option and compare them:
a. $5,000 today:
Since the amount is already in present value terms, which means it is the current worth, there is no calculation required. The present value would be $5,000.
b. $15,000 five years from today:
We'll use the formula to calculate the present value:
Present Value = 15,000 / (1 + 0.09)^5
c. $1,000 per year for 15 years:
This is an annuity, a series of annual payments. We can use the present value of an ordinary annuity formula:
Present Value = 1,000 * [1 - (1 / (1 + 0.09)^15)] / 0.09
Now that we have the present value for each option, compare the values to determine which option is the most preferable. Choose the option with the highest present value, as this would provide the greatest current worth.
I hope this explanation helps you solve the problem. Let me know if you have any further questions!