discount rate present value

10% $37,907.87

year 1 2 3 4 5

cash flow 10000 10000 10000 10000 10000

financial modeling by simon benninga

discount rate present value

10% ($2,092.13)

year 0 1 2 3 4 5

cash flow -40000 10000 10000 10000 10000 10000

discount rate present value IRR

10% ($2,092.13) 8%

year 0 1 2 3 4 5

cash flow -40000 10000 10000 10000 10000 10000

COST IRR

1000 15%

LOAN TABLE

DIVISION OF PAYMENT BETWEEN INTEREST AND RETURN ON CAPITAL

YEAR 1 2 3 4 5 6

PRINCIPAL AT THE BEGINNING PAYMENT AT THE END 1000 850 777.5 744.125 255.74375 -605.8946875 300 200 150 600 900

INTEREST 150 127.5 116.625 111.61875 38.3615625

Consider an investment costing $1,000 today that pays off at the end of years 1, 2, , 5.

F PAYMENT BETWEEN INTEREST AND RETURN ON CAPITAL

PRINCIPAL 150 72.5 33.375 488.38125 861.6384375

PAYMENT AT THE END -1000 300 200 150 600 900 IRR 24%

MINUS 1000 IS ASSUMED TO SEE WHAT IF IN

00 IS ASSUMED TO SEE WHAT IF INVESTMENT IS SOLD AT THE BEGINNING IT IS NECESSARY FOR CALCULATING IRR

COST IRR

1000 24%

Consider an investment costing $1,000 today

YEAR 1 2 3 4 5 6

LOAN TABLE PRINCIPAL AT THE BEGINNING PAYMENT AT INTEREST THE ENDPRINCIPAL 1000 940 965.6 1047.344 698.70656 -33.6038656 300 240 200 225.6 150 231.744 600 251.3626 900 167.6896

DIVISION OF PAYMENT BETWEEN INTEREST AND RETURN ON CAPITAL

60 -25.6 -81.744 348.63744 732.3104256

MULTIPLE INTERNAL RATE OF RETURN DISCOUNT RATE NPV 6% ($3.76) CASH FLOW 0 1 2 3 4 5 -145 100 100 100 100 -275

YEAR

IRR 1 IRR 2

9% 27%

FLAT PAYMENT SCHEDULE

LOAN PRINCIPAL INTEREST RATE LONG TERM ANNUAL PAYMENT

10000 7% 6 $2,097.96

Notice that we have put "PV"Excel's nome returns a negative payment (a minor irritant

You can confirm that this answer is correct by creating a loan table:

LOAN PRINCIPAL INTEREST RATE LONG TERM ANNUAL PAYMENT

10000 7% 6 $2,097.96

YEAR

PRINCIPAL AT THE PAYMENT BEGINNING AT THE END OF THE YEAR OF YEAR

SPLIT PAYMENT INFORMATION INTEREST 700 602.1428 497.4356 385.3989 265.5196 137.2488

1 2 3 4 5 6

10000 8602.04 7106.2228 5505.698396 3793.137284 1960.696894

2097.96 2097.96 2097.96 2097.96 2097.96 2097.96

PAYMENT SCHEDULE

we have put "PV"Excel's nomenclature for the initial loan principalwith a minus sign. Otherwise Excel gative payment (a minor irritant).

SPLIT PAYMENT INFORMATION RETURN OF PRINCIPAL 1397.96 1495.817 1600.524 1712.561 1832.44 1960.711

Future Values and Applications AMOUNT TO BE DEPOSITED INTEREST TIME PERIOD

1000 10% 10

FUTURE VALUE

$2,593.74

FUTURE VALUE WIT ANNUAL DEPOSITS

INITIAL DEPOSIT AMOUNT TO BE DEPOSITED EACH YEAR TIME HORIZON INTEREST

1000 1000 10 10%

FUTURE VALUE

$17,531.17

Microsoft Excel 12.0 Answer Report Worksheet: [excel financial modelling examples.xlsx]PENSION PROBLEM Report Created: 7/25/2011 2:57:37 AM

Target Cell (Min) Cell Name $E$32 deposit at beginning year

Original Value Final Value 48000 0

Adjustable Cells Cell Name $E$32 deposit at beginning year

Original Value Final Value 48000 0

Constraints Cell Name $G$32 total in account in end of year $G$33 total in account in end of year $G$34 total in account in end of year $G$35 total in account in end of year $G$36 total in account in end of year $G$37 total in account in end of year $G$38 total in account in end of year $G$39 total in account in end of year $G$40 total in account in end of year $G$41 total in account in end of year $G$42 total in account in end of year $G$43 total in account in end of year $G$44 total in account in end of year

Cell Value 0 51840 107827.2 168293.376 233596.8461 219884.5938 205075.3613 189081.3902 171807.9014 153152.5335 133004.7362 111245.1151 87744.72427

Formula $G$32>=0 $G$33>=0 $G$34>=0 $G$35>=0 $G$36>=0 $G$37>=0 $G$38>=0 $G$39>=0 $G$40>=0 $G$41>=0 $G$42>=0 $G$43>=0 $G$44>=0

Status Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding Not Binding

Slack 0 51840 107827.2 168293.376 233596.8461 219884.5938 205075.3613 189081.3902 171807.9014 153152.5335 133004.7362 111245.1151 87744.72427

interest annual deposit annual retirement withdrawel

8% 48000 30000

table without using solver:_

year 0 1 2 3 4 5 6 7 8 9 10 11 12

account balance beg-year 0 51840 107827.2 168293.4 233596.8 304124.6 296054.6 287338.9 277926 267760.1 256780.9 244923.4 232117.3

interest deposit at earned beginning during year year 48000 48000 48000 48000 48000 -30000 -30000 -30000 -30000 -30000 -30000 -30000 -30000 3840 7987.2 12466.18 17303.47 22527.75 21929.97 21284.36 20587.11 19834.08 19020.81 18142.47 17193.87 16169.38

table with using solver to see accurate result

year 0 1 2 3 4 5 6 7 8 9 10 11 12

account balance beg-year 0 0 51840 107827.2 168293.4 233596.8 219884.6 205075.4 189081.4 171807.9 153152.5 133004.7 111245.1

interest deposit at earned beginning during year year 0 48000 48000 48000 48000 -30000 -30000 -30000 -30000 -30000 -30000 -30000 -30000 0 3840 7987.2 12466.18 17303.47 16287.75 15190.77 14006.03 12726.51 11344.63 9852.203 8240.379 6499.609

1.7 A Pension ProblemComplicating the Future Value Problem A typical exercise follows. You are 55 years old and intend to retire at age 60. To make your retiremen intend to start a retirement account. n At the beginning of each of years 0, 1, 2, , 4 (i.e., starting today and for each of the next four years) intend to make a deposit into the retirement account. You think that the account will earn 8 percent p n After retirement at age 60, you anticipate living eight more years.[3] During each of these years you withdraw $30,000 from your retirement account. Of course, account balances will continue to earn 8 p How much should you deposit annually in the account? The following spreadsheet fragment shows ho can go wrong in this kind of problemin this case, you've calculated that in order to provide $30,000 eight years, you need to contribute $240,000/5 = $48,000 in each of the first five years. As the spreads you'll end up with a lot of money at the end of eight years! (The reasonyou've ignored the powerful compound interest. If you set the interest rate in the spreadsheet equal to 0 percent, you'll see that yo

There are two ways to solve this problem. The first involves Excel's Solver. This can be found on the To

note:-

it is always necessary to give percentage sign when putting interest slover can be found in data tab at right side otherwise get it

total in account in end of year 51840 107827.2 168293.4 233596.8 304124.6 296054.6 287338.9 277926 267760.1 256780.9 244923.4 232117.3 218286.7

solver is used to see that how much minimum investment should m

>=

this mean greater than equal to zero

total in account in end of year 0 51840 107827.2 168293.4 233596.8 219884.6 205075.4 189081.4 171807.9 153152.5 133004.7 111245.1 87744.72

t age 60. To make your retirement easier, you

nd for each of the next four years), you the account will earn 8 percent per year. 3] During each of these years you want to balances will continue to earn 8 percent. g spreadsheet fragment shows how easily you that in order to provide $30,000 per year for the first five years. As the spreadsheet shows, onyou've ignored the powerful effects of ual to 0 percent, you'll see that you're right.)

olver. This can be found on the Tools menu.[

when putting interest tab at right side otherwise get it from loading it from add-ins

ch minimum investment should me made to achieve certail goals in future

greater than equal to zero