Please, I need a little help accountants.

[Dooby]

Eddy Money signed a three-year contract to host the Tonight Show. Although he will receive 130 million dollars over three years, the terms of the contract are that he is to receive 10 million at the end of each of the next three years plus an additional 100 million at the end of the third year. Assuming an annual interest rate of 10 percent, what is the actual value of Money's contract in today's dollars?

Well?

 

[SumBlackguyz]

one star

 

[Dooby]

one star

The money will be worth one star today?

But of course! Why didn't I think of that

Spoiler

 

[Mountain]

Never studied accounting, but I'll give it a shot:

Current value = present value

PV = fvn/ (1+r)^n

PV = 130'000'000/ (1+0.1)^3

PV = 130'000'000 / 1.331

PV = 97670924.11

The current value of the contract = $97'670'924.11

 

[Cory MBA]

$100,000,000

Go to Excel and enter this: =PV(0.10,3,10000000,100000000)

 

[Mountain]

$100,000,000

Go to Excel and enter this: =PV(0.10,3,10000000,100000000)

Nah, i think you're off slim, this is what he should enter into excel:

=PV(0.10,3,0,130000000)

0.1 = the rate, 3 = number of years, 0 = constant payment made each period (its zero because its not fixed, it's not an annuity contract) and, FV = 130000000.00

I think the FV threw you off the most, it threw me off initially; The future value = the first set of cash flows after each year (10'000'000) in addition to the final cash flow received at the end of the the third year (100'000'000) = (10'000'000*3) + (100'000'000) = 130'000'000.

So:

97670924.11 = PV(0.10,3,0,130000000)

 

[He Who Posts Well]

Eddy Money signed a three-year contract to host the Tonight Show. Although he will receive 130 million dollars over three years, the terms of the contract are that he is to receive 10 million at the end of each of the next three years plus an additional 100 million at the end of the third year. Assuming an annual interest rate of 10 percent, what is the actual value of Money's contract in today's dollars?

Well?

If I remember correctly, first find the PV of the revenue stream. Then find the present value of an annuity due for the $100. Add both together and you have your answer.

 

[Cory MBA]

Nah, i think you're off slim, this is what he should enter into excel:

=PV(0.10,3,0,130000000)

0.1 = the rate, 3 = number of years, 0 = constant payment made each period (its zero because its not fixed) and, FV = 130000000.00

I think the FV threw you off the most, it threw me off initially; The future value = cash flow after each year (10'000'000) in addition to the final amount received at the end of the the third year (130'000'000) = (10'000'000*3) + (100'000'000) = 130'000'000.

So:

97670924.11 = PV(0.10,3,0,130000000)

It's $100,000,000.

It's basically a trick question....The given contractual rate of return is 10% and you are being paid 10% of $100M each year ($10M). In other words, you would fare the same if you received $100M now and invested it at 10% OR if you received an annuity of $10M for 3 years with a lump sum payment of $100M at the end.

PV is $100M.

When entering this into Excel you have to account for the annual payments at the given rate and the lump sum payment at the end.

 

[Mountain]

It's $100,000,000.

It's basically a trick question....The rate of return is 10% and you are being paid 10% of $100M each year. In other words, you would fare the same if you received $100M now and invested it at a 10% OR if you received an annuity of $10M for 3 years with a lump sum payment of $100M at the end.

Nah man, that's the discount rate, not the return on investment, remeber the r in a PV equation is the discount variable. In fact, the point of the PV equation is to discount future cashflow, not to exponentiate it, I belive what your thinking about is the FV equation.

PV is $100M.

Again, it cant be...

When entering this into Excel you have to account for the annual payments at the given rate and the lump sum payment at the end.

"pmt is the payment is the payment made each period and cannot change over the life of the investment" - excel

Now if it was a contract that said, he will recive 10'000'000 at the end of each year, nothing else, cool, but they threw in the additional 100 at the end of the third year, so we're no longer dealing with an annuity investment.

 

[Mountain]

Hope none of yall caught the error I edited earlier

 

[Cory MBA]

Nah man, that's the discount rate, not the return on investment, remeber the r in a PV equation is the discount variable. In fact, the point of the PV equation is to discount future cashflow, not to exponentiate it, I belive what your thinking about is the FV equation.



Again, it cant be...



"pmt is the payment is the payment made each period and cannot change over the life of the investment" - excel

Now if it was a contract that said, he will recive 10'000'000 at the end of each year, nothing else, cool, but they threw in the aditional 130 at the end of the third year, so we're no longer dealing with an annuity investment.

I see where your error is: You are thinking that he gets a future payment of $130M. He isn't. He gets $100M at the end of the contract. It's throwing your logic off.

The scenario purposely phrased the $130M in total payments like that in order to confuse the reader.

 

[Mountain]

I see where your error is: You are thinking that he gets a future payment of $130M. He isn't. He gets $100M at the end of the contract. It's throwing your logic off.

The scenario purposely phrased the $130M in total payments like that in order to confuse the reader.

I know, I've accounted for the 100'000'000 at the end of the contract, check my earlier post below:

I think the FV threw you off the most, it threw me off initially; The future value = the first set of cash flows after each year (10'000'000) in addition to the final cash flow received at the end of the the third year (100'000'000) = (10'000'000*3) + (100'000'000) = 130'000'000.

I think i know where you might be wrong, hold up nikka let me type up my response right quick.

 

[CrimsonTider]

The 10 million each year has to plugged into the PV annuity formula.

The 100 mill has to be plugged into the PV of $1 formula

 

[Mountain]

It's $100,000,000.

It's basically a trick question....The given contractual rate of return is 10% and you are being paid 10% of $100M each year ($10M). In other words, you would fare the same if you received $100M now and invested it at 10% OR if you received an annuity of $10M for 3 years with a lump sum payment of $100M at the end.

PV is $100M.

When entering this into Excel you have to account for the annual payments at the given rate and the lump sum payment at the end.

The highlighted is where i think you're wrong at breh.

An 100'000'000 10% annuity agreements does not offer an equivalent cash flow in comparison to the agreement specified in Doobys question. You will not receive an interest payment of $100'000'000 at the end of the third annuity year, you will receive $10'000'000 only, so an $100'000'000 annuity investment of 10% can not possibly be nullified by Doobies example, because both income flows differ.

Also, the question did not specify a annuity discount rate, that means they are talking about the 10% compounded. Even then a $100'000'000 10% compounded for three years, lets say in a crazy ass bank account, does not return an interest payment income of $100'000'000 at the end of the third year, nor does it return an interest payment 10'000'000 at the end of the second year, so again, a compounded discount rate cannot possibly be nullified by Doobies example because both income flows differ completely.

Lastly, the FV of the agreement specified by Doobie is 130'000'000, so even if the discount effect was nullified (which it isn't), the PV could not be 100'000'000, it would have to be the same as the FV, which is $130'000'000.

 

[Cory MBA]

The highlighted is where i think you're wrong at breh.

An 100'000'000 10% annuity agreements does not offer an equivalent cash flow in comparison to the agreement specified in Doobys question. You will not receive an interest payment of $100'000'000 at the end of the third annuity year, you will receive $10'000'000 only, so an $100'000'000 annuity investment of 10% can not possibly be nullified by Doobies example, because both income flows differ.

Also, the question did not specify a annuity discount rate, that means they are talking about the 10% compounded. Even then a $100'000'000 10% compounded for three years, lets say in a crazy ass bank account, does not return an interest payment income of $100'000'000 at the end of the third year, nor does it return an interest payment 10'000'000 at the end of the second year, so again, a compounded discount rate cannot possibly be nullified by Doobies example because both income flows differ completely.

Lastly, the FV of the agreement specified by Doobie is 130'000'000, so even if the discount effect was nullified (which it isn't), the PV could not be 100'000'000, it would have to be the same as the FV, which is $130'000'000.

The scenario says that he will receive $10M at the end of each year AND he will receive $100M at the end of Year 3. He will receive $110M at the end of year 3.

When setting up the scenario, you should overlook the fact that they mentioned $130M. You should not input this figure anywhere in Excel. Its a red herring meant to confuse the student. Ignore the $130M.

When dealing with PV...there is a difference in how you set up an annuity versus an annuity with a lump sum payment.

For testing purposes, the answer would be $100M PV.