Question

Durran has recently acquired a rare art piece that he plans to put on display in his private collection. He estimates that revenues generated from donations and admissions tickets to see the new exhibit will be $15,000 per year for the next five years. If he requires a rate of return of 9%, how much are the expected cash flows worth for him today? Round to two decimal places.

This is what I need: Show answers using the BA II Plus calculator (N, I/Y, PV, PMT, and FV)

(i) Develop the timeline (linear representation of the timing of cash flows)

(ii) Identify the time value of money variable which needs to be calculated in the question.

(iii) Identify the values of the remaining four variables (PV, FV, PMT, N or Rate) from the question. Be sure to input positive or negative signs.

(iv) Calculate the correct value of the variable identified in step (ii).

Answer 1

(i) Develop the timeline (linear representation of the timing of cash flows) :

Durran estimates revenues of  $15,000 per year for the next five years.

We will represent the cash flow diagram in Excel :

In the diagram the lines pointed upwards for each year from 1 to 5 represent Inflows of cash. r is the notation for the required rate of return.

(ii) Identify the time value of money variable which needs to be calculated in the question :

We need to find how much are the expected cash flows worth for him today, which is the Present Value of the expected cash flows, so the variable which needs to be calculated is the PV variable.

(iii) Identify the values of the remaining four variables :

PMT : the expected revenue per year = 15,000

N : the number of years for which cash flows are expected = 5

Rate (I/Y) = 9%

FV : Future Value of cash flows (not required in this case, hence zero)

(iv) Calculate the correct value of the variable identified in step (ii) :

Steps On the BA II Plus calculator :

First clear the TVM memory by pressing 2nd > FV.

First step : Press 5 then press N

Second : Press 9 then press I/Y

Third : Press 15000 then PMT

Fourth : Press 0 ("zero") then FV

Last : Press CPT , then PV

It should display PV = -58,344.76895 (ignore the negative sign)

Hence, the Present Value of the expected cash flows = $58,344.77 (rounded to two decimal places)