Macmillan and Grunski Consulting – Discounted Cash Flow Analysis

Annual Rate : 8.36%

Question No.
1 Normally, Investors consider their opportunity cost of capital when they determing the appropriate discount ra

2a. Future value of a single amount of $18,000 after 1 year with an interest 8.36% will be:

$ 19,504.80

2b If the CD pays 3.2%, the future value of $18,000 invested will be $ 18,576.00
If the CD pays 16.8%, the future value of $18,000 invested will be $ 21,024.00
The bigger the interest, the bigger is return on the investment (future value).
However, if interest level is lower than inflation rate, the reality would be different and actual future value will d

2c The effective annual rate in this case would be 8.53%

Therefore, the value of the CD at the end of the year with the interest rate compounded semiannually will be

If we use the EAR for explanation, the real interest (EAR) when using compounded interest will
be higher (EAR is 8.53%) than the nominal rate (8.36%), which is the same as EAR for an annual
rate. The EAR of the compounded interest is higher is the result of reinvesting the interest, rather
than paying it out, so that interest in the next period is then earned on the principal sum plus previously-accum

2d effective annual rate for CD at the Pacific Trust will be: 8.63%
The value is going to be $ 19,552.64

For the Bay State and Loan the effective annual rate for CD is going to be:
The value at maturity then will be $ 19,569.30

Since compounded interest involves earning on the interest earned in prior periods, the future value of
the deposit using this compound interest will be bigger than that using annual interest. In other
words, when interest is calculated for the second period (for compound interest), the base for it
includes not only a principal, but also all the previously earned interest. Therefore, since the base
is bigger, the value will be bigger too. Thus the more frequent the compounding, the more
quickly the principle will build and the more interest can be collected, resulting in a higher future value.

2e Bay State Savings

Semi annual compounding 8.72%
First Natinal Bank 4.27%

they should charge 4.27% semi annually to make it equivalent ot the daily compounding of Bay State
Cash Flow Analysis

the appropriate discount rate.

nd actual future value will decrease.

nded semiannually will be $ 19,536.25

r an annual
terest, rather
sum plus previously-accumulated interest.

8.72%

the future value of

est. In other
e base for it
ince the base

higher future value.

compounding of Bay State Savings.

4a FV $ 35,000.00
NPR 6
INTEREST 8.36%
PV -$21,619.92
In order to accumulate $35,000 in 6 years with 8.4% annual rate -$21,619.92 must be invested today.

4b PV $ 18,000.00
FV $ 35,000.00
NPER 6
Interest 11.72%

If only $18,000 will be invested today, in order to accumulate $35,000 in 6 years, deposit should be made with the 1

4c PV $ 18,000.00
FV $ 35,000.00
NPER 12
INTEREST 5.70%

In this situation, the total number of periods will be n = 6 years x 2 periods in a year = 12.
As a result, we will get the periodic rate for 6 months period (5.70%).
Or a nominal rate of 11.4 compounded semiannually.

To check ourselves we can find EAR for this periodic rate. To do so we will need to raise it to the second power (or m
For Pacific Trust:
PV $ 18,000.00
FV $ 35,000.00
NPER 24
INTEREST 2.81%

Number of periods in this case will be 6 years x 4 quarters in a year = 24 periods.

Therefore, the interest rate is 2.81%.
invested today.

hould be made with the 11.72% annual rate.

o the second power (or multiply the number by itself), which is going to be 11.72%
5a This is going to be ordinary annuity since the payments are made at the end of the year. This annuity includes paym

5b PMT 3000
NPER 6
INTEREST 8.36%
FV $22,208.52

The future value of the ordinary annuity over 6-year period with a payment of $3,000 is going to be

5c EAR annualy 8.69%

EAR quaterly 8.63%
EAR daily 8.72%

the First National Bank

PMT 3000
NPER 6
INTEREST 8.69%
FV $22,392.97

The future value of the annuity over 6-year period, with a payment of $3,000 and interest compounded semiannual

PMT 3000
NPER 6
INTEREST 8.63%
FV $22,357.90

The future value of the annuity over 6-year period, with a payment of $3,000 and interest that is compounded quar

PMT 3000
NPER 6
INTEREST 8.72%
FV $22,410.19

The future value of the annuity over 6-year period, with a payment of $3,000 and interest that is compounded daily

5d FV 35000
NPER 6
INTEREST 8.36%
PMT -$4,727.91

To accumulate $35,000 at an 8.36% annual rate in 6 years, the payment of $ 4,727.91

5e In Part b we have got future value of $22,208.52

FV $22,208.52
NPER 6
 INTEREST 8.36%
PV -$13,718.47

In order to get ending value from Part b $22,208.52 with an 8.36% annual rate,
$13,718.47 should be deposed today.

5f It is an ordinary annuity.
To find the future value of payments with annual interest, first, we should align interest period (yearly) with paymen

NPER 12
INTEREST 4.10%
PMT 1500
FV $22,663.36

The future value of the annuity over 6-year period, with a payment of $1,500 made semiannually
and interest compounded yearly, is going to be $22,663.36

To find the effective annual rate for semiannually compounded period with a semiannual
payment period, we should simply divide annual rate by 2 periods 4.18%
We can simply divide because the compound period and the payment period are aligned.

NPER 12
INTEREST 4.18%
PMT $ 1,500.00
FV $22,772.83

The future value of the annuity over 6-year period, with a payment of $1,500 made semiannually
and interest compounded semiannually, is going to be $22,772.83

NPER 12
INTEREST 4.22%
PMT 1500
FV $22,830.07

The future value of the annuity over 6-year period, with a payment of $1,500 made semiannually
and interest compounded quarterly, is going to be $22,830.07
ear. This annuity includes payments of $3,000 over the next 6 years.

0 is going to be $22,208.52

erest compounded semiannually will be $22,392.97

erest that is compounded quarterly will be $22,357.90

erest that is compounded daily will be $22,410.19

is required by the end of each period.

est period (yearly) with payment period (semiannual).

emiannually

emiannually

emiannually
6a It is annuity due because payments are made at the beginning of each period. This is beneficial
because the annuity essentially has another period during which it can grow. Therefore, annuity
dues generally earn more than ordinary annuities.

6b PMT $ 3,000.00
NPER 6
INTEREST 8.36%
FV $24,065.15

The future value of the ordinary annuity over 6-year period with a payment of $3,000 is going to be

6c EAR annualy 8.69%

EAR quaterly 8.63%
EAR daily 8.72%

the First National Bank

PMT $ 3,000.00
NPER 6
INTEREST 8.69%
FV $24,338.45

The future value of the annuity over 6-year period, with a payment of $3,000 and interest compounded semiannual

PMT 3000
NPER 6
INTEREST 8.63%
FV $24,286.44

The future value of the annuity over 6-year period, with a payment of $3,000 and interest that is compounded quar

PMT 3000
NPER 6
INTEREST 8.72%
FV $24,363.99

The future value of the annuity over 6-year period, with a payment of $3,000 and interest that is compounded daily
Frequency of compounding has an influence on future value, as well as time when the money was invested
Future value will be bigger if interest is compounding more often, or/and if money was deposited earlier.
annuity due, for example, has bigger future value than ordinary annuity with all other variable been equal

6d FV $ 35,000.00
NPER 6
INTEREST 8.36%
PMT -$4,363.16
 To accumulate $35,000 at an 8.36% annual rate in 6 years, the payment of $ 4,363.16 is required by the end of ea

6f To find the future value of payments with annual interest, first, we should align interest period (yearly) with paymen

NPER 12
INTEREST 4.10%
PMT 1500
FV $23,591.68

The future value of the annuity over 6-year period, with a payment of $1,500 made semiannually
and interest compounded yearly, is going to be $23,591.68

To find the effective annual rate for semiannually compounded period with a semiannual
payment period, we should simply divide annual rate by 2 periods 4.18%
We can simply divide because the compound period and the payment period are aligned.

NPER 12
INTEREST 4.18%
PMT $ 1,500.00
FV $23,724.73

The future value of the annuity over 6-year period, with a payment of $1,500 made semiannually
and interest compounded semiannually, is going to be $23,724.73

NPER 12
INTEREST 4.22%
PMT 1500
FV $23,794.34

The future value of the annuity over 6-year period, with a payment of $1,500 made semiannually
and interest compounded quarterly, is going to b $23,794.34
 going to be $24,065.15

st compounded semiannually will be $24,338.45

st that is compounded quarterly will be $24,286.44

st that is compounded daily will be $24,363.99

money was invested
deposited earlier.
ariable been equal
 is required by the end of each period.

period (yearly) with payment period (semiannual).

7a the schedule of payment from Payment C in Table 1.

0 $ 1,000.00
1 $ 1,500.00
2 $ 2,000.00
3 $ -
4 $ 3,500.00
5 $ 4,500.00
6 $ 5,500.00
INTEREST 8.36%
NPV $ 13,035.67

The net present value of mixed stream shown in the table is $ 13,035.67

PV $ 13,035.67
NPER 6
INTEREST 8.36%
FV ₹ 21,103.15

The future value of mixed stream is ₹ 21,103.15

7b Let’s first find a present value of the $35,000.

FV $ 35,000.00
NPER 6
INTEREST 8.36%
PV $ -21,619.92

Since the required present value of future $35,000 is $ 21,619.92

We need to find a required payment for the stream, which will be the difference between the new PV and PV calcula
plus the payment of $1,000 which was included in the PV from the question 7a:

Therefore, the new schedule of payments should be as shown in the following table.

0 $ 9,584.25
1 $ 1,500.00
2 $ 2,000.00
3 $ -
4 $ 3,500.00
5 $ 4,500.00
6 $ 5,500.00
INTEREST 8.36%
NPV $ 21,619.92

The new payment today is $ 9,584.25 The present value in this case will be $ 21,619.92
een the new PV and PV calculated in question 7a
$ 9,584.25

required to make $35,000 in the future.

8a Effective annual rate should be calculated using continuously compounding interest formula:
Therefore, the effective annual rate is 8.72%

8b PV $ 18,000.00
NPER 6
INTEREST 8.72%
FV $ 29,724.49

The future value of invested $18,000 in six years will be $ 29,724.49 with 8.72%

8c NPER 6
INTEREST 8.72%
PMT $ 3,000.00
FV $ 22,410.78

The difference between the two numbers is because interest in first calculation was compounded for a whole sum o
where in the second example the same amount was deposited in payments of $3,000 at the end of each period ove
Therefore the interest did not have as much principle to work with, and therefore did not earn as much.
Therefore, the overall interest earned fell beyond the interest earned on the lump sum.

NPER 6
INTEREST 8.72%
PMT $ 3,000.00
FV $ 24,364.86

The difference in two values is because annuity due starts receiving interest on its payments starting at period 0,
compared to ordinary annuity when just first payment is made at the end of year 1.
Annuity due has one more period for accumulating the interest and, therefore, the future value of it is bigger than o
 8.72%

annual rate

mpounded for a whole sum of $18,000 started from year 1,

the end of each period over the 6 years period.
t earn as much.

ents starting at period 0,

re value of it is bigger than of ordinary annuity.

 9
We must calculate the payments that the clients are making to pay off their current loan of 35,000 to hopefully owe
The number of periods is 4, and the interest and payment plan are the same (annual).

PV $ 35,000.00
NPER 4
INTEREST 10.2%
PMT $ -11,089.32

Therefore, the amount of interest and principal the clients must pay per payment to pay off the
loan in four years with 10.2% interest is $ 11,089.32

10
First we should find the future value of the loan they will receive in payments of $13,500 each.

NPER 4
INTEREST 10.69%
PMT 13,500
FV $ 70,059.48

The clients will need to repay

$ 70,059.48 of the loan.
To do this, they want to pay off the loan quarterly.
Then we should find the effective annual rate for the interest compounded quarterly
Over the 15 years, it is going to be 60 periods.
Now we can find the payment.

PV $ 70,059.48
NPER 60
INTEREST 2.55%
PMT -2,235.54

The payment on the loan per quarter is $ 2,235.54

f 35,000 to hopefully owe a future balance of zero

$ 35,000.00