Financial math

[nguyenhaphuong]

Hi, im studying financial math and i meet a big challenge with this exercise. Please help me ! thank a lot!
A project requires an initial investment of 7000$ and is guaranteed to yield a return of 1500$ at the end of the first year, 2500$ at the end of second year, and x at the end of third year. Find the value of x$ correct to the nearest $ given that net present value is 838,18 when the interest rate is 6% compounded annually

 

[Cubist]

You didn't show us any work, did you read the posting guidelines? Because of this I'm not sure how you're expected to lay your work out. Have you been given any examples that you could use as a starting point? If not, then this is how I'd do it:-

Cash flows grouped by time...

Time	Amount ($)	NPV ($)
Now	-7000	-7000
End of 1st year	1500	?
End of 2nd year	?	?
End of 3rd year	?	?
		Total OF NPV COLUMN = ?

Can you fill in the "?" cells in the table above

 

[JeffM]

With respect to Cubist's presentation, I like it as a form of presenting the investment, but it does not say which question marks actually require computation. In other words, it explains the answer but does not directly explain the work done to find the answer.

 

[Cubist]

In response to JeffM's good point, the bold, double, question marks below require some calculation (they aren't amounts given directly in the question)!

Cash flows grouped by time...

Time	Amount ($)	NPV ($)
Now	-7000	-7000
End of 1st year	1500	??
End of 2nd year	?	??
End of 3rd year	?	??
		Total OF NPV COLUMN = ?

 

[JeffM]

@Cubist

Nice way to clarify your method.

The question mark in the middle column of the next to last row should also be??

 

[Cubist]

Nice way to clarify your method.

The question mark in the middle column of the next to last row should also be??

After seeing this comment, I realised there's multiple ways of using the table to get an answer...

A) I was thinking of writing the variable "x" in the cell you refer to, and then in the cell to the right I'd write an expression for the NPV of x. Then, when the total is considered it would produce an equation that could then be solved for x

B) Just put numbers into the cells (no variables) in the following order...

Time	Amount ($)	NPV ($)
Now	-7000	-7000
End of 1st year	1500	??3
End of 2nd year	?1	??4
End of 3rd year	??6	??5 (=total - the cells above)
		Total OF NPV COLUMN = ?2

You're probably thinking of method B? Actually I think this method may be more elegant!

 

[JeffM]

After seeing this comment, I realised there's multiple ways of using the table to get an answer...

A) I was thinking of writing the variable "x" in the cell you refer to, and then in the cell to the right I'd write an expression for the NPV of x. Then, when the total is considered it would produce an equation that could then be solved for x

B) Just put numbers into the cells (no variables) in the following order...

Time	Amount ($)	NPV ($)
Now	-7000	-7000
End of 1st year	1500	??3
End of 2nd year	?1	??4
End of 3rd year	??6	??5 (=total - the cells above)
		Total OF NPV COLUMN = ?2

You're probably thinking of method B? Actually I think this method may be more elegant!

Actually, we probably should label the rightmost column PV rather than NPV. it is only the summation of that column that is a NET present value.

Your tabular method makes clear that we add up a series of present values to find a net present value. We find the present value of the net cash flow by period, and then take the algebraic sum of those present values.

 

[Cubist]

OP - if you decide to post back with your work, and you want to use the table - then you can hit "reply" to post#4 to quickly copy the table into your post. Just remove the "QUOTE" tags and the other text surrounding the table. Then put your own numbers in.