Present Value Calculations
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The Engineering Economics Finance Company (EEFC) had approached Dr. T. Man, a private investor, the day before. It seemed that EEFC was interested in loaning money to Computers R Us Enterprises, one of its larger clients, but Computers R Us Enterprises' demands were such that EEFC could not manage the whole thing. Specifically, Computers R Us wanted a loan for $712,000 offering to repay EEFC $276,000 per year over the next seven years. EEFC made Dr. T. Man the following proposition. Because it was bringing him business, its directors argued that they felt it was only fair for him to put up a proportionally larger share of the money. If Dr. T. Man would put up 60% of the money ($427,200), then EEFC would put up the remaining 40% ($284,800). The two parties would split the payments evenly, each one getting $138,000 at the end of each year for the next 7 years.
a. EEFC can earn 18% on its money. Using this interest rate, what is the present worth of Computers R Us' offer to EEFC? Show calculations.
b. What is the present worth of the deal to EEFC if Dr. T. Man participates as proposed? Show calculations.
c. Dr. T. Man does not have access to the same investments as EEFC. In fact, if he does nothing else with his money, he will invest it in a certificate of deposit (CD) that can earn 8% over the next 7 years. Using this interest rate, what is Dr. T. Man's present worth of the offer made to him? Show calculations.
Need help setting up problem and drawing cash flow diagram.
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Solution Summary
The present value of a deal is calculated and the details are provided in the solution.
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a. EEFC can earn 18% on its money. Using this interest rate, what is the present worth of Computers R Us' offer to EEFC? Show calculations.
The present worth of the offer is the present value of annual payments of
$276,000 per year over the next 7 years minus the loaned amount
loaned amount= $712,000
Annual payment= $276,000
To find the present value of annuity we multiply the annual payment by PVIFA Present Value Interest Factor for an Annuity
PVIFA( n, ...
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