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indianshaft · Jan 26, 2009, 04:38 PM

I am trying to find a required rate of return percentage that will make it so I can pick either offer without caring.

I have 2 offers

One is to receive 252,000 dollars today
Two is to receive 100,000 dollars every year for the next four years

Currently the required rate of return is 5%.

So for this one I chose offer 2. I got an present value of 291,726.23 for offer 2 and 240,000 for offer one.

I think I did that right or am I looking for a future value on this question?

It then goes on to ask at what percentage am do I not care which one I choose.

Thanks

codyman144 · Jan 26, 2009, 04:46 PM

You need to solve for at what rate of return will the NPV of option two equal 252,000.

Give it a try if you still cannot figure it out come back here. Do you have a financial calculator?

indianshaft · Jan 26, 2009, 05:05 PM

I do have a financial calculator. So I am just trying to find the percentage that makes PV for offer 2 equal to 252,000?

indianshaft · Jan 26, 2009, 05:06 PM

Am I correct in choosing option 2 over option 1?

indianshaft · Jan 26, 2009, 05:15 PM

All right, I got 8.92% sound right?

codyman144 · Jan 26, 2009, 10:05 PM

Your right to choose offer two however, your calculations are not correct.

Offer one is today therefore no discounting necessary the offer is worth the full $252,000.

I get a larger PV for offer two than you do, how did you calculate and what kind of financial calculator do you have? I have a TI-BA2 Plus. Even without one PV isn't too hard to do with a spreadsheet. Sum the present values of the payment stream. The Present values are calculated as follows:

PV = PMT / 1 + r ^ n

Whereas: PMT is payment, r is discount rate, ^ to the power of, N = the year of the payment.

So the year two payment would be:

100,000 / 1.05 ^ 2, simplify to:
100,000 / 1.1025 = 90,702.95

The way I gave you the formula will work if put into excel. I will tell you how to solve with the financial calculator if you have the same one I do.

Second part of the question you are solving for IRR basically. Don't remember that formula off hand but here is how you solve with my financial calculator.

First make sure your compounding periods per year equals 1. To do this: hit buttons 2nd, I/Y, 1 enter.

Then enter: 4, N, 0, FV, 100,000, PMT, -252,000, PV, CPT I/Y

I am getting a much higher discount rate needed than you are. Are you sure you are supposed to use one compounding period per year because otherwise this changes it all…

Hope you get this in the morning, I will be at work but I will try to check in.