hi,
Instrument will pay nothing for 3 years, but pay 20,000 a year for 4 years. All payments made at year end.
N = 4
I/Y = 8
PMT = 20000
CPT PV 66242.53
But why in the answers they go an additional step and divide this number by 1.083 ? I guess we have to discount this back for the 3 first years right? But can this be done on financial calculator in one step? Or do you have to do 2 different steps. Can someone explain how to do this with financial calc?
$66,242.53 is the present value at time 3. It also assumes the first payment occurs 1 year after time 3 (you are using END on your calculator). If you used BGN, the PV would be 71,541.93 and you would have to divide by 1.084.
You can use the CF worksheet to save some time: CF0=0, C01=0, F01=3, C01=20000,F02=4, NPV, I=8 CPT 52,585.46
Cool, thanks, was able to do on my calc. Could you maybe explain the CF features in relation to this question?
CF0: cash flow at time 0. Depending on the question at hand, this could be the initial investment in a project
CFi: ith cash flow
F0i: the number of times CFi occurs
For your question, at time 0, there was no cash flow; no cash flows for the next 3 years; at times 4, 5, 6, 7 we had $20,000. NPV will discount all cash flows back to time 0. Just like most PV questions, drawing a time line helps.
Thank you!