- The document discusses different cash flow patterns including single amounts, annuities, and mixed streams.
- It then provides examples of calculating future values of cash flows using compound interest formulas, including deposits into money market accounts and evaluating annuity streams.
- The key considerations are determining the present and future values, interest rates, and time periods in order to select the more attractive cash flow option.
Chapter 1 - Overview of Financial Statement Analysis
Solution Manual Wild
Financial Statement Analysis -
f i n a n c i a l
s tat e m e n t
a n a l y s i s
TENTH EDITION
K. R.
SUBRAMANYAM
JOHN J. WILD
The existing business environment is very turbulent so corporate houses find it very difficult in managing their financial statement. In such scenario, financial management plays significant role for the companies for managing and organizing their financial data and
statements. In the following study different financial tools and techniques will be applied on the London Woods company to analyze its financial performance which will help it in decision making.
Chapter 1 - Overview of Financial Statement Analysis
Solution Manual Wild
Financial Statement Analysis -
f i n a n c i a l
s tat e m e n t
a n a l y s i s
TENTH EDITION
K. R.
SUBRAMANYAM
JOHN J. WILD
The existing business environment is very turbulent so corporate houses find it very difficult in managing their financial statement. In such scenario, financial management plays significant role for the companies for managing and organizing their financial data and
statements. In the following study different financial tools and techniques will be applied on the London Woods company to analyze its financial performance which will help it in decision making.
CFA LEVEL 1- Time Value of Money_compressed (1).pdfAlison Tutors
This document focuses on End of Chapter questions and commonly asked questions under Quantitative methods (Time Value of Money ) . The mainly asked questions include :
-calculation and interpretation of Future Value and Present Value of a single sum of money , an ordinary annuity, annuity due, a perpetuity (PV only) and a series of unequal cash flows.
-demonstration of the use of timelines in modeling and solving time value of money
This is a very interesting topic!
CFA LEVEL 1- Time Value of Money_compressed (1).pdfAlison Tutors
This document focuses on End of Chapter questions and commonly asked questions under Quantitative methods (Time Value of Money ) . The mainly asked questions include :
-calculation and interpretation of Future Value and Present Value of a single sum of money , an ordinary annuity, annuity due, a perpetuity (PV only) and a series of unequal cash flows.
-demonstration of the use of timelines in modeling and solving time value of money
This is a very interesting topic!
CHAPTER 9Time Value of MoneyFuture valuePresent valueAnn.docxtiffanyd4
CHAPTER 9
Time Value of Money
Future value
Present value
Annuities
Rates of return
Amortization
9-‹#›
1
Time lines
Show the timing of cash flows.
Tick marks occur at the end of periods, so Time 0 is today; Time 1 is the end of the first period (year, month, etc.) or the beginning of the second period.
CF0
CF1
CF3
CF2
0
1
2
3
I%
9-‹#›
2
Drawing time lines
100
100
100
0
1
2
3
I%
3 year $100 ordinary annuity
100
0
1
2
I%
$100 lump sum due in 2 years
9-‹#›
3
Future Value of Money
If you deposit $1,000 today at 10%, how much will you have after 15 years?
Interest($) = Principal ∙ Interest Rate(%)
Simple Interest
The original principal stays the same.
There is no interest on interest. The interest is only on the original principal.
Compound Interest
The principal changes through time.
There is “interest on interest”. The interest is on the new principal.
9-‹#›
9-‹#›
9-‹#›
Simple Interest
Interest($) = Principal($) ∙ Interest Rate(%) = V0 ∙ I
V1 = V0 + Interest = V0 + V0 ∙ I = V0(1 + I)
V2 = V1 + Interest = V1 + V0 ∙ I = V0(1 + I) + V0 ∙ I
= V0(1 + I + I) = V0(1 + 2I)
V3 = V2 + Interest = V2 + V0 ∙ I = V0(1 + 2I) + V0 ∙ I
= V0(1 + 2I + I) = V0(1 + 3I)
.
.
Vn = V0(1 + nI)
FVn = PV(1 + nI)
9-‹#›
Compound Interest
Interest ($) = Principal ($) ∙ Interest Rate (%) = V ∙ I
V1 = V0 + Interest = V0 + V0 ∙ I = V0(1 + I)
V2 = V1 + Interest = V1 + V1 ∙ I = V1(1 + I)
V3 = V2 + Interest = V2 + V2 ∙ I = V2(1 + I)
V2 = V1(1 + I) = V0(1 + I)(1 + I) = V0(1 + I)2
V3 = V2(1 + I) = V0(1 + I)2(1 + I) = V0(1 + I)3
Vn = V0 (1 + I)n
FVn = PV(1 + I)n = PV∙FVIF
V2 = V1 + Interest = V1 + (V0 + Interest) ∙ I
9-‹#›
Example
What is the future value of $20 invested for 2 years at 10%?
Simple: FV = PV(1+nI)
= 20(1+2I) = 20(1+0.2) = $24
Compound: FV = PV(1+I)n
= 20(1+I)2 = 20(1+0.1)2 = $24.2
What is the future value of $20 invested for 100 years at 10%?
Simple: FV = 20(1+ ) =
Compound : FV = 20(1.1)100 = 275,612.25
9-‹#›
The Power of Compounding
The Value of Manhattan
In 1626, the land was bought from American Indians at $24.
In 2018, value = $24(1+I)392
9-‹#›
Solving for FV:
The formula method
Solve the general FV equation:
FVN = PV∙(1 + I)N = PV ∙ FVIF
FV15 = PV∙(1 + I)15 = $1,000∙(1.10)15 = $4,177.25
= $1,000∙4.177 = $4,177
(Table A)
9-‹#›
Present Value of Money
If you want to have $4,177.25 after 15 years, how much do you have to deposit today at 10%?
9-‹#›
PV = ?
4,177.25
Present Value of Money
Finding the PV of a cash flow or series of cash flows is called discounting (the reverse of compounding).
0
1
2 …
15
10%
9-‹#›
13
Solving for PV:
The formula method
Solve the general FV equat.
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Macroeconomics- Movie Location
This will be used as part of your Personal Professional Portfolio once graded.
Objective:
Prepare a presentation or a paper using research, basic comparative analysis, data organization and application of economic information. You will make an informed assessment of an economic climate outside of the United States to accomplish an entertainment industry objective.
1. Q1 Difine and differentiate among the three basic patterns of cash flow?
• Single amount – A lump-sum amount either currently held or expected at some future
date.
• Annuity – A level periodic stream of cash flow. We will work with annual cash flow.
• Mixed stream – A stream of cash flow that is not an annuity; a stream of unequal
periodic cash flows that reflect no particular pattern.
Q2 Assume a firm makes a $ 2500 deposit into its money maker account. If this account is
currently paying 0.7% what will the account balance be after 1 year?
Here, Pv= 2500, r=.7% or .7/100 , t= 1 year.
Then,𝐹𝑉 = 𝑃𝑉(1 + 𝑟) 𝑡
= 2500(1+.7/100)^1
= $ 2517.5 (ans)
Q3. Ramesh Abdul wishes to choose the better of two equally costly cash flow streams:
annuity X and annuity Y. X is an annuity due with a cash inflow of $9,000 for each of 6
years. Y is an ordinary annuity with a cash inflow of $10,000 for each of 6 years. Assume
that Ramesh can earn 15% on his investments.
a. On a purely subjective basis, which annuity do you think is more attractive?
Why?
b. Find the future value at the end of year 6, FVA6, for both annuity X and
annuity Y.
c. Use your finding in part b to indicate which annuity is more attractive. Why?
Compare your finding to your subjective response in part a.
Solution:
2. On the surface, annuity Y looks more attractive than annuity X because it provides $1,000 more
each year than does annuity X. Of course, the fact that X is an annuity due means that the $9,000
would be received at the beginning each year, unlike the $10,000 at the end of each year, and this
makes annuity X more appealing than it otherwise would be.
B) Annuity X.
Here , C= 9000, r= 15% or, .15 , n= 6.
Then , Annuity due= FIVA 15%; 6years * pv
= 8.754* ( 1+.15)^1
= 10.0671
Then, annuity is’; c*FIVA
= 9000* 10.0671
= 90603.9
Annuity Y , Here , C= 10000, r= 15% or, .15 , n= 6.
𝐹𝑉 =
𝑐
𝑟
[(1 + 𝑟) 𝑡
− 1]
=
10000
0.15
[(1 + 0.15)6
− 1]
=66666.66 (2.3130 – 1 )
= 87,537.37
C. Annuity X is more attractive because its future value at the end of year 6, FV6, of $90,603.90
is greater than annuity Y’s end-of-year-6 future value, FV6, of $87,540.00. The subjective
assessment in part a was incorrect. The benefit of receiving annuity X’s cash inflows at the
beginning of each year appears to have outweighed the fact that annuity Y’s annual cash inflow,
which occurs at the end of each year, is $1,000 larger ($10,000 vs. $9,000) than annuity X’s
Problem : E4-2 : If Bob and Judy combine their savings of $ 1,260 and $ 975, respectively,
and deposit this amount into an account that pays 2% annual interest, compounded
monthly, what will the account balance be after 4 years?
3. Here, Bob’s deposit Amount $1260 & Zudy’s Deposit amount 975.
Then , the prenciple amount = ( 1260+975)
= $ 2235 their present value.
Interest rate r= 2% or .02/12 , Period 12*4= 48.
We, know, 𝐹𝑉 = 𝑃𝑉(1 + 𝑟) 𝑡
=2235(1+.02/12)^48
= $ 2420.98 (ans)
Problem: E4-3: Gabrielle just won $ 2.5 million in the state lottery. She is given the option
of receiving a total of $ 1.3 million now, or she can elect to be paid $100,000 at the end of
each of the next 25 years. If Gabrielle can earn 5% annually on her investments, from a
strict economic point should she take?
Given That,
C= 100,000 , r=5% or, 0.05 , t= 25 years.
Present value of Annuity =
𝑐
𝑟
[1 − (1 + 𝑟)−𝑡
]
= 100,000/.05 { 1- (1+.05)^-25}
= 2000000 ( 1- 0.29530)
= 1409394.457
$1,409,394 So PV of Future Cash payments at $1,409,394 is higher than $1,300,000 which she is
being offered now. SO she should take the 2nd option.
4. Problem : P4-4 : Use the FVIF in Appendix Table A-1 in each of the cases shown in the table
on the facing page to estimate, to the nearest year, how long it would take an initial deposit,
assuming no withdrawals, a) to double, b) to quadruple. Case Interest rate, i
A 7%, B 40%, C 20% ,D 10%.
Here,
a) To double the initial deposit. It means FV=2, PV=1
b) To quadruple the initial deposit. It means FV=4, PV=1
A) 𝐹𝑉 = 𝑃𝑉(1 + 𝑟) 𝑛
2= 1(1+.07)^n
Or, 1.07^n= 2
Or, n ln1.07= ln2 (taking Ln both the two
sides)
Or, n= ln2/ln 1.07
N=10.24 ( Nearest to 10 Years)
A-2)Another,
𝐹𝑉 = 𝑃𝑉(1 + 𝑟) 𝑛
Or, 4= 1(1+.07)^n
Or, N* ln 1.07= ln 4
Or, n= ln4/ln1.07
N= 20.48 (nearest to 20 years)
B) 𝐹𝑉 = 𝑃𝑉(1 + 𝑟) 𝑛
Or, 2= 1(1+.40)^n
Or, n* ln 1.40 = ln 2
Or n= ln2/ ln 1.40
N=2.060 ( nearest to 2 years)
C) 𝐹𝑉 = 𝑃𝑉(1 + 𝑟) 𝑛
Or, 2= 1(1+.20)^n
Or, n* ln 1.20= ln 2
Or, n= ln 2/ ln 1.20
n= 3.80 ( near to 4 years)
B-2) Another, 𝐹𝑉 = 𝑃𝑉(1 + 𝑟) 𝑛
Or, 4= 1(1+.40)^n
Or, n* ln 1.40 = ln 4
Or, n= ln 4/ ln 1.40
N= 4.12 ( nearest to 4 years)
C-2)another,
4= 1(1+.20)^n
Or, n* ln 1.20= ln 4
Or, n= ln 4/ ln 1.20
n= 7.60 ( near to 8 years)
D) 2= 1(1+ .10)^N
Or, n* ln 1.10= ln 2
Or, n= ln2/ ln 1.10
N=7.27 (near to 7 years)
D-2)Another ,
4= 1(1+.10)^n
Or, n* ln 1.10=ln 4
Or,n= ln4/ln1.10
N=45.54 ( near to 15 years) {AnS}
Problem : P4=5:
5. For each of the cases shown in the following table, calculate the future value of the single
cash flow deposited today that will be available at the end of the deposit period if the
interest is compounded annually at the rate specified over the given period.
Case Single Cash
Flow
Interest
Rate %
Deposit
Period
A $ 200 5 20
B 4500 8 07
C 10000 9 10
D 25000 10 12
E 37000 11 05
F 40000 12 09
Now, In Case A: PV= $200 , r= 5% or 0.05, Period t= 20 Years.
Then, 𝐹𝑉 = 𝑃𝑉(1 + 𝑟) 𝑛
= 200 ( 1+.05)^20
= 530.65
Case B: PV= $ 4500 , r=8% or, .08 , t= 7 Years.
Then , 𝐹𝑉 = 𝑃𝑉(1 + 𝑟) 𝑛
= 4500 ( 1+ .08) ^ 7
= 7712.20
Case C: PV= $ 10000, R= 9%, or , 0.09 , t= 10 years.
Then, FV= 10000 (1+ .09)^10
= 23673.63
Case d: PV= 25000, r= .10 , t=12
Then, FV= 25000(1+.10)^12
=78460.70
Case E: PV=$ 37000, r= .11 , t= 5
Then, FV= 37000( 1+ .11) ^5
6. =62347.15
Case F: PV= 40000, r= .12 , t= 9
Then, FV= 40000( 1+.12)^9
=110923.15
Problem: P5-9
Single Payment Loan repayment A person borrows $200 to be repaid in 8 years with 14%
annually compounded interest. The loan may be repaid at the end of any earliar year with
no prepayment penelty.
a) What amount will be due if the loan is repaid at the end of year 1?
b) What is the repayment at the end of year 4?
c) What amount is due at the end of the eight year?
Solution:
A) Here,
PV= $200, Interest Rate r= 14% or, 0.14, Year t= 1.
Now,
The furmula of Future value ,
FV= 𝑃𝑣(1 + 𝑟)^𝑛
= 200(1+ .14)^1
= 200*1.14
= 228
B) PV= $200 , r= .14, t= 4
𝐹𝑉 = 𝑃𝑉(1 + 𝑟) 𝑛
=200 (1+.14)^4
= 337.79
C) Pv=$200, r=.14 , t= 8 years
FV= 200(1+.14)^8