Professional Documents
Culture Documents
Question 1
The wealthy donor needs to set aside an amount equal to the PV of the salary.
a)
b)
c)
1,067,478
1,250,000
2,500,000
Question 2
a) The cashflows from the pipeline are a growing perpetuity where the growth rate is nagativ
###
Discount Rate
Year
flows (in $M)
scount Factor
Flow (CF*DF)
11%
0
1
2
3
2
1.920
1.843
0.9009009 0.81162243 0.73119138
1.8018018 1.55831507 1.34773195
$12.60 millions
$12.60
Question 3
Discount Rate
Year
Cash Flow
scount Factor
Flow (CF*DF)
18%
0
$
1
470.0 $
0.847
398.31
2
3
4
640.0 $ 4,350.0 $ 2,750.0
0.718
0.609
0.516
459.64
2,647.54
1,418.42
a) PV CFs (1 + 4)
b) Starting Value for Growing Perpituity (CF in 5)
$
$
4,924
1,600
5%
18%
12,308
6,348
11,272
Year
Cash Flow
scount Factor
Flow (CF*DF)
0
$
1
470.0 $
0.847
398.31
PV CFs (1 + 4) (Unchanged)
Starting CF for Level Perpetuity (t=5)
PV of Level Perpetuity (Value at t=4)
PV of Level Perpetuity (Value at t=0)
PV for All Cash Flows
e) Value Due to Long Term NPV Projects
2
3
4
640.0 $ 4,350.0 $ 2,750.0
0.718
0.609
0.516
459.64
2,647.54
1,418.42
$
$
$
$
$
$
4,924
1,950
10,833
5,588
10,512
760
6.75%
Question 4
Key Idea: The cash flows in a growing perpetuity start at some level and grow at a constant r
Note: This is the earliest we could apply the growing perpetuity formula to accurately compu
Cash flows before this date would need to discounted back to the present indivuallly as we d
a)
Year
1
2
3
4
5
Cash Flow
120.0
135.5
200.0
220.0
242.0
Cash Flow Growth Rate* 12.9%
47.6%
10.0%
10.0%
* E.G. CF growth rate from t=1 to t=2 is computed as (135.5-120)/120 (Same calcualtion for
Year 3
b)
Year
1
2
3
4
5
Cash Flow
600.0
800.0
300.0
320.0
380.0
Cash Flow Growth Rate
33.3%
-62.5%
6.7%
18.8%
Year 5
c)
Year
1
2
3
4
5
Cash Flow
7,000.0
8,000.0
9,000.0
10,000.0
12,500.0
Cash Flow Growth Rate
14.3%
12.5%
11.1%
25.0%
Year 4
Question 5
Discount Rate
3%
My Salary (t= $
85,000
Growth Rate (
5.5%
Years to work
30
Partner Salary $100,000
Growth Rate (
3.5%
Years to work
25
Bequest to Ch
0
Desired Growt
2%
Find this Using Solver (or Trial and Error) to Set Diff B
Consumption $
148,227
Solver may need to be added to excel: (Windwows menu, excel options, add-in
Year
1
Discount Fact 0.97087379
Income (Me) ( $
85,000
Income (Partn $ 100,000
Total HH Inco $ 185,000
PV HH Income $ 179,612
2
0.94259591
$
89,675
$ 103,500
$ 193,175
$ 182,086
3
0.91514166
$
94,607
$ 107,123
$ 201,730
$ 184,611
4
0.88848705
$
99,811
$ 110,872
$ 210,682
$ 187,188
5
0.86260878
$ 105,300
$ 114,752
$ 220,052
$ 189,819
HH Consumpti $ 148,227
PV Cons Each $ 143,909
$ 151,191
$ 142,512
$ 154,215
$ 141,129
$ 157,299
$ 139,758
$ 160,445
$ 138,402
Saving (Withd $
Account Bala $
Savings Rate
36,773 $
36,773 $
20%
PV of HH Inco $6,155,274
PV of HH Cons $6,155,274
Diff PV Total $
(0)
41,984 $
47,515 $
53,383 $
59,607
79,860 $ 129,771 $ 187,047 $ 252,265
22%
24%
25%
27%
The key idea needed to solve this - the present value of consumption must be equal to the pr
The PV of Housheold income is caluclated by simple discounting and is invariant to the consu
The household consumption path is set by adjusting the expenditure in the first year. By the
The level of the consumption in the first period is set so that the PV of all consumption is equ
Savings account balance: grows (falls) with savings (withdrawals/borrowing) and interest plus
a) Amount Spent
$ in
148,227
Year 1
Savings Rate
20%
b) Savings Rate Year 12
38%
c) Bank balance
$ t 987,821
= 12
d) Bank Balance
$5,811,173
t = 30
Computed above. Could be caluclated independently as the futu
e) This is solved by adding $500,000 to household consumption at year t=55 and recomputin
Consumption plan is found by looking for the starting level of consumption (including this beq
Amount Spent $ 145,857
Reduction in $
2,369
n to Problem Set I
d Financial Management
*(1-1/(1.08^25))
000/(0.08-0.04)
4
5
6
7
8
9
1.769
1.699
1.631
1.566
1.503
1.443
0.65873097 0.59345133 0.53464084 0.48165841 0.4339265 0.39092477
1.16560601 1.00809169 0.87186308 0.75404375 0.65214594 0.56401811
5
1,600.0
0.437
5
1,950.0
0.437
10.0%
6
266.2
6
456.0
20.0%
6
15,625.0
25.0%
wows menu, excel options, add-ins, solver add-in). It is then found in "Data" menu.
6
0.83748426
$ 111,092
$ 118,769
$ 229,860
$ 192,504
7
0.81309151
$ 117,202
$ 122,926
$ 240,127
$ 195,245
8
0.78940923
$ 123,648
$ 127,228
$ 250,876
$ 198,044
9
0.76641673
$ 130,448
$ 131,681
$ 262,129
$ 200,900
10
0.74409391
$ 137,623
$ 136,290
$ 273,913
$ 203,817
11
0.72242128
$ 145,192
$ 141,060
$ 286,252
$ 206,795
$ 163,654
$ 137,058
$ 166,927
$ 135,727
$ 170,266
$ 134,409
$ 173,671
$ 133,104
$ 177,145
$ 131,812
$ 180,687
$ 130,532
$
66,206 $
73,200 $
80,610 $
88,458 $
96,768 $ 105,565
$ 326,039 $ 409,021 $ 501,901 $ 605,416 $ 720,347 $ 847,522
29%
30%
32%
34%
35%
37%
continues
me in Each Period: SUM(B133:AE133)
10
11
12
13
14
15
1.385
1.330
1.276
1.225
1.176
1.129
0.35218448 0.31728331 0.28584082 0.25751426 0.23199482 0.20900435
0.48779945 0.4218806 0.36486971 0.31556299 0.27291935 0.23603835
12
0.70137988
$ 153,178
$ 145,997
$ 299,175
$ 209,835
13
0.68095134
$ 161,603
$ 151,107
$ 312,710
$ 212,940
14
0.66111781
$ 170,491
$ 156,396
$ 326,886
$ 216,110
15
0.64186195
$ 179,868
$ 161,869
$ 341,737
$ 219,348
16
0.62316694
$ 189,761
$ 167,535
$ 357,295
$ 222,655
17
0.60501645
$ 200,197
$ 173,399
$ 373,596
$ 226,032
$ 184,301
$ 129,265
$ 187,987
$ 128,010
$ 191,747
$ 126,767
$ 195,582
$ 125,537
$ 199,494
$ 124,318
$ 203,483
$ 123,111
ning years.
e at death.
PV of Income.
16
17
18
19
20
1.084
1.041
0.999
0.959
0.921
0.1882922 0.16963262 0.15282218 0.13767764 0.12403391
0.20414128 0.17655462 0.15269589 0.13206131 0.11421519
18
0.58739461
$ 211,208
$ 179,468
$ 390,676
$ 229,481
19
0.57028603
$ 222,825
$ 185,749
$ 408,574
$ 233,004
20
0.55367575
$ 235,080
$ 192,250
$ 427,330
$ 236,602
21
0.53754928
$ 248,009
$ 198,979
$ 446,988
$ 240,278
22
0.5218925
$ 261,650
$ 205,943
$ 467,593
$ 244,033
23
0.50669175
$ 276,041
$ 213,151
$ 489,192
$ 247,869
$ 207,553
$ 121,916
$ 211,704
$ 120,732
$ 215,938
$ 119,560
$ 220,257
$ 118,399
$ 224,662
$ 117,249
$ 229,155
$ 116,111
24
0.49193374
$ 291,223
$ 220,611
$ 511,834
$ 251,789
25
0.47760557
$ 307,240
$ 228,333
$ 535,573
$ 255,793
26
27
28
29
0.46369473 0.45018906 0.43707675 0.42434636
$ 324,138 $ 341,966 $ 360,774 $ 380,617
$ 324,138
$ 150,301
$ 341,966
$ 153,949
$ 360,774
$ 157,686
$ 380,617
$ 161,513
$ 233,738
$ 114,984
$ 238,413
$ 113,867
$ 243,182
$ 112,762
$ 248,045
$ 111,667
$ 253,006
$ 110,583
$ 258,066
$ 109,509
$ 278,096 $ 297,160 $
80,957 $
93,921 $ 107,768 $ 122,550
$4,098,694 $4,518,815 $4,735,336 $4,971,317 $5,228,224 $5,507,621
54%
55%
25%
27%
30%
32%
30
31
32
33
0.41198676 0.39998715 0.38833703 0.37702625
$ 401,551
34
0.3660449
35
0.3553834
$ 401,551
$ 165,434
$ 263,227
$ 108,446
$ 268,492
$ 107,393
$ 273,862
$ 106,351
$ 279,339
$ 105,318
$ 284,926
$ 104,296
$ 290,624
$ 103,283
36
37
38
39
40
0.34503243 0.33498294 0.32522615 0.31575355 0.30655684
$ 296,437
$ 102,280
$ 302,366
$ 101,287
$ 308,413
$ 100,304
$ 314,581
$
99,330
$ 320,873
$
98,366
41
0.297628
$ 327,290
$
97,411
42
43
44
45
46
47
0.28895922 0.28054294 0.27237178 0.26443862 0.25673653 0.24925876
$ 333,836
$
96,465
$ 340,513
$
95,528
$ 347,323
$
94,601
$ 354,270
$
93,683
$ 361,355
$
92,773
$ 368,582
$
91,872
48
49
50
51
0.2419988 0.23495029 0.22810708 0.22146318
$ 375,954
$
90,980
$ 383,473
$
90,097
$ 391,142
$
89,222
$ 398,965
$
88,356
52
53
0.2150128 0.20875029
$ 406,944
$
87,498
$ 415,083
$
86,649
54
55
0.20267019 0.19676717
$ 423,385
$
85,807
$ 431,853
$
84,974
$ (423,385) $ (431,853)
$ 419,274 $
(0)