Solutions to the Present Value Problems
The study uses the formula below to solve the problems.
Formula:
Original Equation: FV = PV * (1+ i) n
Manipulation: Divide both sides by (1 +i) n
Final Equation: PV = FV / (1+ i) n or PV = FV * (1+i) -n
Where
PV = Present Value
FV =Future Value
i= interest rates n = Number of years.
Using the formula presented above, the paper calculates the PV of the $10,000 bond with the 6% of annual coupon at the end of the five-year. Using the Excel Software 2007 for the calculation, the answers to the problems are as follows:
At 6% interest rates, the PV is as follows:
PV = $10,000 / (1 + 0.06)
PV= $7,472.58
Using the excel formula, the solution is as follows:
Excel Formula
=B1 / (1+B2)^
A
B
FV
10000
Interest Rates
0,06
Number of Years
PV
7472,58173
b. At 8% interest rates
PV = $10,000 / (1 + 0.08)
PV = $6,805.83197
Using the Excel formula, the solution is as follows:
Excel Formula
=B1 / (1+B2)^5
A
B
FV
10000
Interest Rates
0,08
Number of Years
PV
c. At 4% interest rates
PV = $10,000 / (1 + 0.04)5
PV = $8,219.27107
Using the Excel formula, the solution is as follows:
Excel Formula
=B1/(1+B2)^5
A
B
FV
10000
Interest Rates
0,04
Number of Years
PV
8219,27107
d. The results of the (a), (b) and (c) reveal that increase in the interest rates decrease the present value of the investment. By January 1, 2000, investors will be willing to pay $8,219.27 if the interest rate is 4%, $6,805.83 if the interest rate is 8% and $7,472.58 if the interest rates are 8%. Thus, investors are advisable to choose the option (b), which the present value is $6,805 since investors will pay the lowest PV for the investment.
Answers to Problem 7-5
a. McDonald Corporation ($Million)
1999 Consolidated Balance Sheet
GAAP
Economic
Difference
Curent Assets
Cash and Equivalents
Account & Notes Receivable
Inventories at cost (not in excess of market)
82.7
Prepaid Expenses & other Current Assets
Total Current Assets
Other Assets
Investments in & advanced to affliates
Intangible Assets (net)
1985.42
Miscellaneous
Total Other Assets
Property & Equipment
Property and Equipment, at cost
22450.8
57776.85
35326.05
Accumulated Depreciation & Amortization
(6126.30)
(15765.95)
(9639.65)
Net Property...
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