You are considering buying some lawn care equipment to do yard work in Stillwater to pay for college.

You are considering buying some lawn care equipment to do yard work in Stillwater to pay for college. You are projecting that you can earn the following amounts of profit after paying operating expenses: $3500 next month and $3100 the following month. Then you will take the winter off and start back up again next spring, when you hope to earn $3600 6 months from now, $3800 7 months from now, and $4200 8 months from now, after which you will leave Stillwater to for full time employment elsewhere. (Discount the first $3500 1 month, the $3100 2 months, etc.) Use a discount rate of 6.5% per year. Show all work below.

a. What is the present value of this cash flow (show hand algebraic calculations)?

b. What is the value of the cash flow (from the lawn equipment problem) if you do not discount the numbers?

c. Could you use a PMT formula to solve this problem? Why, or why not? d. Describe (in words) how you could use Excel to create a template that could be used to solve problems such as the one described in number 5 if the numbers or interest rate were different for each specific situation.

Solutions

Expert Solution

a. Present Value of cash flow =(Cash Flow)/((1+i)^N)

i= interest rate per month=(6.5/12)%=0.5417%=0.0054167

Preset Value of $3500=3500/1.0054167=$3481.14

Preset Value of $3100=3100/(1.0054167^2)=$3066.69

Preset Value of $3600=3600/(1.0054167^6)=$3485.19

Preset Value of $3800=3800/(1.0054167^7)=$3658.99

Preset Value of $4200=4200/(1.0054167^8)=$4022.36

PRESENT VALUE OF CASH FLOW=3481.14+3066.69+3485.19+3658.99+4022.36=$17,714.36

b. IF YOU DO NOT DISCOUNT THE NUMBERS, VALUE=3500+3100+3600+3800+4200=$18,200

c.You cannot use PMT function because PMT can be used for Present Value of Uniform Series Constant Payments at fixed intervals. Here Payments are neither constant nor at fixed intervals

Excel template is given below:

jeff jeffy answered 2 years ago

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