Please, I need a little help accountants.

[Mountain]

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.

Exactly, so the future value is 130'000'000 (as i've stated in the formula above), but for illustration purposes i'll go through the steps of calculating the FV (future value) of the contract below:

FV (future value) = all expected incomes from the agreement, or investment, in question

FV in Doobies example = all expected incomes from the contractual agreement in question

= (10'000'000 [income received for the first year]) + (10'000'000 [income received for the second year]) + (10'000'000 + 100'000'000 [both income received for the last (third) year]

=10'000'000 + 10'000'000 + 10'000'000 + 100'000'000

= 130'000'000

FV (future value) = 130'000'000

See what I mean? The future value is not 100'000'000, it's 130'000'000.00.

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.

You cant, otherwise you'd be ignoring the FV variables and wont be able to calculate the present value of the contractual agreement.

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

I was talking about fixed annuities slim.

 

[Sensitive Blake Griffin]

I hate how accounting problems will give you information that is completely unnecessary to solve the problem.

 

[Cory MBA]

Exactly, so the future value is 130'000'000 (as i've stated in the formula above), but for illustration purposes i'll go through the steps of calculating the FV (future value) of the contract below:

FV (future value) = all expected incomes from the agreement, or investment, in question

FV in Doobies example = all expected incomes from the contractual agreement in question

= (10'000'000 [income received for the first year]) + (10'000'000 [income received for the second year]) + (10'000'000 + 100'000'000 [both income received for the last (third) year]

=10'000'000 + 10'000'000 + 10'000'000 + 100'000'000

= 130'000'000

FV (future value) = 130'000'000

See what I mean? The future value is not 100'000'000, it's 130'000'000.00.



You cant, otherwise you'd be ignoring the FV variables and wont be able to calculate the present value of the contractual agreement.



I was talking about fixed annuities slim.

I follow your logic.

The question is asking for the PV using the terms and amounts given. 3 annual payments of $10M plus a lump sum payment of $100M at the end of Year 3.

The scenario did not state that the future value is $130M. It said that he would be paid a total of $130M over the time specified. There is a difference. A very big difference.

 

[Cory MBA]

I hate how accounting problems will give you information that is completely unnecessary to solve the problem.

It's done that way to make ensure the student can recognize the relevant facts to solve a problem. If the student has a thorough understanding, he will see the nuances.

In this case, the answer is clean and simple...but can look complicated if you factor in unnecessary information.

 

[Brown_Pride]

=pv(rate, nper, pmt, [fv], [type])
i'm sorta torn here.
When using pv the assumption is that NPER is constant, the question is worded silly in that the 3rd payment isn't 10m it's 110m.

I"m inclined to go
=PV(0.1,3,,130000000)

If for no other reason than we DO know the FV of the contract, it's 130m and unless i'm missing something if we know the FV we should account for that correct?

I do see the point you're making Cory but the FV is known here and it's not 100,000,000

 

[Mountain]

I follow your logic.

The question is asking for the PV using the terms and amounts given. 3 annual payments of $10M plus a lump sum payment of $100M at the end of Year 3.

The scenario did not state that the future value is $130M. It said that he would be paid a total of $130M over the time specified. There is a difference. A very big difference.

I see, you trollin me!!?

 

[Cory MBA]

=pv(rate, nper, pmt, [fv], [type])
i'm sorta torn here.
When using pv the assumption is that NPER is constant, the question is worded silly in that the 3rd payment isn't 10m it's 110m.

I"m inclined to go
=PV(0.1,3,,130000000)

If for no other reason than we DO know the FV of the contract, it's 130m and unless i'm missing something if we know the FV we should account for that correct?

I do see the point you're making Cory but the FV is known here and it's not 100,000,000

No. The future value is not $130M. Not when you are receiving annuity payments at $10M per annum and a lump sum of $100M at the end of Year 3. That's a separate calculation and I encourage you to run that scenario in Excel.

The client will receive a total of $130M. It's up to the student to decide how much that amount is worth right now given the terms of the agreement.

 

[Cory MBA]

I see, you trollin me!!?

Nah....I'm serious Wolf.

The reason why I am debating this is because I had a grad-level Finance course with scenario's like this. To answer this question I went back to the spreadsheet that I prepared as a reference. There is a specific way to have Excel calculate the PV of a regular annuity...and then another way to use the Excel PV formula to calculate an annuity with a lump sum payment at the end.

There appears to be no difference..but if you choose wrong, you will come up with an incorrect answer.

This solution here is perfectly circular and brought the student right back to $100M.

I am interested in seeing everyone's calculations. I do understand everyone's logic. But using the $130M as a future value and then walking it back will provide the incorrect answer.

 

[Mountain]

=pv(rate, nper, pmt, [fv], [type])
i'm sorta torn here.
When using pv the assumption is that NPER is constant, the question is worded silly in that the 3rd payment isn't 10m it's 110m.

In this case there is no npre constant, because the aggregate cash flows per annum are not equal, therefore the npre is zero, as we both agree:

I"m inclined to go
=PV(0.1,3,,130000000)=

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

=PV(0.10,3,0,130000000)

If for no other reason than we DO know the FV of the contract, it's 130m and unless i'm missing something if we know the FV we should account for that correct?

You're not missing anything.

I do see the point you're making Cory but the FV is known here and it's not 100,000,000

Exactly, it's given to us and it's $130'000'000, whether you calculate it manually or use direct reference to the question as a variable, the FV remains the same.

Nah....I'm serious Wolf.

The reason why I am debating this is because I had a grad-level Finance course with scenario's like this. To answer this question I went back to the spreadsheet that I prepared as a reference. There is a specific way to have Excel calculate the PV of a regular annuity...and then another way to use the Excel PV formula to calculate an annuity with a lump sum payment at the end.

There appears to be no difference..but if you choose wrong, you will come up with an incorrect answer.

This solution here is perfectly circular and brought the student right back to $100M.

I am interested in seeing everyone's calculations. I do understand everyone's logic. But using the $130M as a future value and then walking it back will provide the incorrect answer.

Agian, this takes absolutely nothing away from you, I've seen the stock trading thread you made a while back, you seemed to be the only person on sohh that knew what he we talking about regarding the matter, so I've got mad respect for you, but you are still wrong here.

 

[Cory MBA]

In this case there is no npre constant, because the aggregate cash flows per annum are not equal, therefore the npre is zero, as we both agree:







You're not missing anything.



Exactly, it's given to us and it's $130'000'000, whether you calculate it manually or use direct reference to the question as a variable, the FV remains the same.



Agian, this takes absolutely nothing away from you, I've seen the stock trading thread you made a while back, you seemed to be the only person on sohh that knew what he we talking about regarding the matter, so I've got mad respect for you, but you are still wrong here.

Respect. It's all good.

Enjoyed the debate.

 

[Chief]

Hope none of yall caught the error I edited earlier

I caught that your FV was greater than your PV but I thought you were

 

[Brown_Pride]

Nah....I'm serious Wolf.

The reason why I am debating this is because I had a grad-level Finance course with scenario's like this. To answer this question I went back to the spreadsheet that I prepared as a reference. There is a specific way to have Excel calculate the PV of a regular annuity...and then another way to use the Excel PV formula to calculate an annuity with a lump sum payment at the end.

There appears to be no difference..but if you choose wrong, you will come up with an incorrect answer.

This solution here is perfectly circular and brought the student right back to $100M.

I am interested in seeing everyone's calculations. I do understand everyone's logic. But using the $130M as a future value and then walking it back will provide the incorrect answer.

out of curiosity what method are you using to calculate the PV with a lump sum payment at the end?

I guess the question then is what is the FV or is it unknown.

I read the 130m to be FV in the question...

 

[Nascimento]

Future value is the value of an asset at a specific date. In this problem, we have three payments of $10m, $10m, and $110m. Now these values are nominal - it's three separate future values because it's three different dates. Lumping them together and talking about a single total future value of $130m is thus totally nonsensical.

The PV of the first payment is $10m/1.1 = $9.1m
The PV of the second payment is $10m/(1.1^2) = $8.3m
The PV of the final payment is $110m/(1.1^3) = $82.6m
The sum of these is $100m, which is the correct PV of the payments in this problem.

Whoever earlier said to calculate the PV of an annuity at $10m and the PV of three year future value $100m was correct. You then solve the problem with three calculations instead of four above in my solution, the purpose of which was merely to illustrate my point.

Now using the PV of these payments you could also calculate a FV at any other date, say five years from now at a specified interest rate. But this has nothing to do with the problem at hand.

Cory MBA got it correct, and I hope I made it more clear.

 

[Cory MBA]

out of curiosity what method are you using to calculate the PV with a lump sum payment at the end?

I guess the question then is what is the FV or is it unknown.

I read the 130m to be FV in the question...

Future Value wasn't being asked in the scenario presented...but Present Value was being sought.

Since that was the case, I went to Excel and used the PV function. There are a few ways to use that function in Excel, depending on the information given in the scenario. We had time periods, annuity amounts, an interest rate, and a lump sum payment.

=PV(0.10,3,10000000,100000000)

 

[Brown_Pride]

Future value is the value of an asset at a specific date. In this problem, we have three payments of $10m, $10m, and $110m. Now these values are nominal - it's three separate future values because it's three different dates. Lumping them together and talking about a single total future value of $130m is thus totally nonsensical.

The PV of the first payment is $10m/1.1 = $9.1m
The PV of the second payment is $10m/(1.1^2) = $8.3m
The PV of the final payment is $110m/(1.1^3) = $82.6m
The sum of these is $100m, which is the correct PV of the payments in this problem.

Whoever earlier said to calculate the PV of an annuity at $10m and the PV of three year future value $100m was correct. You then solve the problem with three calculations instead of four above in my solution, the purpose of which was merely to illustrate my point.

Now using the PV of these payments you could also calculate a FV at any other date, say five years from now at a specified interest rate. But this has nothing to do with the problem at hand.

Cory MBA got it correct, and I hope I made it more clear.

that makes sense. If you don't read the 130 as the FV as i and wolf did then yes this would be correct.