Discount rate

NPV
IRR

8%
71.01
10.56%

Year
0
1
2
3
4
5
6
7
8
9
10

Cash flow
-600
100
100
100
100
100
100
100
100
100
100

Decision: The NPV > 0 and hence you should purchase the asset.
Note that the IRR > discount rate, which leads to the same decision.

Cost
Payment
Interest

10,000
$2,983.16 <-- =PMT(B4,5,-B2)
15%

LOAN TABLE

year
1
2
3
4
5
6

Division of payment
between interest
Principal
Payment and return of principal
at beginning
at end
of year
of year
Interest
Principal
10000.00
$2,983.16
1500.00
1483.16
8516.84
$2,983.16
1277.53
1705.63
6811.22
$2,983.16
1021.68
1961.47
4849.74
$2,983.16
727.46
2255.69
2594.05
$2,983.16
389.11
2594.05
0.00

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18

Discount rate
Initial payment
NPV

15%
100
-226.52

Year
0
1
2
3
4
5
6
7
8
9
10
11

-1000.00
100.00 <-- =B3
110.00 <-- =B8*1.1
121.00 <-- =B9*1.1
133.10
146.41
161.05
177.16
194.87
214.36
235.79
259.37

Use solver to find the answer.

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

Discount rate
NPV

20%
76.71

Year
0
1
2
3
4
5
IRR1
IRR2

Cash flow
-500
600
300
300
200
-1000
6.34%
60.20%

Since the NPV > 0 for interest

rates between 6.34% and 60.20%,
you would invest in the project
if the discount rate is 20%.

0%
4%
8%
12%
16%
20%
24%
28%
32%
36%
40%
44%
48%
52%
56%
60%
64%
68%
72%

76.71
-99.3347
-29.4699
17.72083
48.38769
66.97176
76.70671
79.96436
78.49546
73.59927
66.24427
57.15483
46.874
35.80937
24.26678
12.47534
0.606037
-11.2143
-22.8925
-34.361

100
50
0
-50
-100
-150

0%

20%

J
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22

40%

60%

80%

A
1
2
3
4
5
6
7 Year
8
9
10
11
12
13
14
15
16
17
18 IRR

IRR?

0
1
2
3
4
5

-800
300
200
150
122
133

year
1
2
3
4
5
6
=E9-H9

10.00%

LOAN TABLE
=-B8

Principal
at beginning
of year
800.00
580.00
438.00
331.80
242.98
134.28

Division of payment
between interest
Payment and return of principal
at end
of year Interest Principal
300
80.00
220.00
200
58.00
142.00
150
43.80
106.20
122
33.18
88.82
133
24.30
108.70
=$E$2*E9

5.07% <-- This uses the Excel formula, =IRR(B8:B13)

=F9-G9

J
1
2
3
4
5
6
7
8
G9
9
10
11
12
13
14
15
16
17
18

Loan principal
Term (years)
Interest
Annual payment

100,000
5
13%
$28,431.45

Loan principal
Interest rate
annual
monthly
Loan term (months)
Monthly payment
Part c of the question:
Month
Remaining payments
Principal at beginning of month

15,000
15%
1.25%
48
$417.46

5
44
$14,062.76

Month
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35

Principal at
Split of payment between:
beginning of month Payment Interest Principal
15,000.00
417.46
187.50
229.96
14,770.04
417.46
184.63
232.84
14,537.20
417.46
181.72
235.75
14,301.46
417.46
178.77
238.69
14,062.76
417.46
175.78
241.68
13,821.09
417.46
172.76
244.70
13,576.39
417.46
169.70
247.76
13,328.63
417.46
166.61
250.85
13,077.78
417.46
163.47
253.99
12,823.79
417.46
160.30
257.16
12,566.63
417.46
157.08
260.38
12,306.25
417.46
153.83
263.63
12,042.62
417.46
150.53
266.93
11,775.69
417.46
147.20
270.27
11,505.42
417.46
143.82
273.64
11,231.78
417.46
140.40
277.06
10,954.71
417.46
136.93
280.53
10,674.19
417.46
133.43
284.03
10,390.15
417.46
129.88
287.58
10,102.57
417.46
126.28
291.18
9,811.39
417.46
122.64
294.82
9,516.57
417.46
118.96
298.50
9,218.07
417.46
115.23
302.24
8,915.83
417.46
111.45
306.01
8,609.82
417.46
107.62
309.84
8,299.98
417.46
103.75
313.71
7,986.27
417.46
99.83
317.63
7,668.64
417.46
95.86
321.60
7,347.03
417.46
91.84
325.62
7,021.41
417.46
87.77
329.69
6,691.72
417.46
83.65
333.81
6,357.90
417.46
79.47
337.99
6,019.91
417.46
75.25
342.21
5,677.70
417.46
70.97
346.49
5,331.21
417.46
66.64
350.82

36
37
38
39
40
41
42
43
44
45
46
47
48

4,980.39
4,625.18
4,265.54
3,901.39
3,532.70
3,159.40
2,781.43
2,398.74
2,011.26
1,618.94
1,221.71
819.52
412.31

417.46
417.46
417.46
417.46
417.46
417.46
417.46
417.46
417.46
417.46
417.46
417.46
417.46

62.25
57.81
53.32
48.77
44.16
39.49
34.77
29.98
25.14
20.24
15.27
10.24
5.15

355.21
359.65
364.14
368.69
373.30
377.97
382.69
387.48
392.32
397.22
402.19
407.22
412.31

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47

Cost of car, cash

Deferred payment plan
Cash payment
Monthly payment
Number of months
Bank car loan rate (annual)
Bank car loan rate (monthly)
9.a. Present value of deferred payment plan
Dealer's monthly IRR
Annualized (in this case, multiplied by 12)

30,000

5,000
1,050
30
15%
1.25%
31,133.35
1.56%
18.73%

Month
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30

Payment under
Cash car deferred payment
payment
plan
30,000
5,000
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050
0
1,050

F
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47

Difference
25,000
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050
-1,050

A
1
2
3
4
5
6
7
8
9
10
11

Annual payment
Interest rate
Number of years
Total value

15,000
10%
5
$91,576.50 <-- =FV(B4,B5,-B3,,0)

Year
1
2
3
4
5
6

Accumulation Payment
at beginning
at end
of year
of year
0
15,000
15,000
15,000
31,500
15,000
49,650
15,000
69,615
15,000
91,577

H
1
2
3
Interest
4 on beg. year
5 accumulation
6
0.00
7
1,500.00
8
3,150.00
9
4,965.00
10
6,961.50
11

Annual payment
Interest rate
Number of years
Total value

15,000
10%
5
$100,734.15 <-- =FV(B4,B5,-B3,,1)

Year
1
2
3
4
5
6

Accumulation Payment
at beginning
at end
of year
of year
15,000
15,000
31,500
15,000
49,650
15,000
69,615
15,000
91,577
0
100,734

Interest
on beg. year
accumulation
1,500.00
3,150.00
4,965.00
6,961.50
9,157.65

A
1
2
3
4
5
6
7
8
9
10
11

Monthly payment
Number of months

250
120

Effective monthly return?

Accumulation

1.514%
85,000 <-- =FV(B6,B4,-B3,,1)

Effective annual interest

Using monthly compounding
Multiplying the monthly return by 12

19.77% <-- =(1+B6)^12-1

18.17%

Interest rate
Number of payments
Number of withdrawals
Size of annual withdrawal

10%
30
20
100,000

Size of payment

5,175.61
Year

Present value of payments

Present value of withdrawals
Difference (this should be zero)

Check
Future value at age 65 of payments
Present value at age 65 of withdrawals

Use Solver to do this easily--you can also do

this analytically.

53,669.00
53,669.00
0.00

$936,492.01
$936,492.01

Age
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43

35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78

Total, beg.
of year
0.00
5,693.17
11,955.65
18,844.38
26,421.99
34,757.36
43,926.26
54,012.05
65,106.43
77,310.24
90,734.43
105,501.04
121,744.31
139,611.91
159,266.26
180,886.06
204,667.83
230,827.78
259,603.73
291,257.27
326,076.16
364,376.94
406,507.81
452,851.75
503,830.10
559,906.27
621,590.07
689,442.24
764,079.63
846,180.77
936,492.01
920,141.21
902,155.33
882,370.86
860,607.95
836,668.75
810,335.62
781,369.18
749,506.10
714,456.71
675,902.38
633,492.62
586,841.88
535,526.07

44
45
46
47
48
49
50

79
80
81
82
83
84
85

479,078.68
416,986.54
348,685.20
273,553.72
190,909.09
100,000.00
0.00

Payment
Beg. of year
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
5,175.61
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00

Withdrawal
Beg. of year
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00

Total, end
of year
5,693.17
11,955.65
18,844.38
26,421.99
34,757.36
43,926.26
54,012.05
65,106.43
77,310.24
90,734.43
105,501.04
121,744.31
139,611.91
159,266.26
180,886.06
204,667.83
230,827.78
259,603.73
291,257.27
326,076.16
364,376.94
406,507.81
452,851.75
503,830.10
559,906.27
621,590.07
689,442.24
764,079.63
846,180.77
936,492.01
920,141.21
902,155.33
882,370.86
860,607.95
836,668.75
810,335.62
781,369.18
749,506.10
714,456.71
675,902.38
633,492.62
586,841.88
535,526.07
479,078.68

0.00
0.00
0.00
0.00
0.00
0.00

100,000.00
100,000.00
100,000.00
100,000.00
100,000.00
100,000.00

416,986.54
348,685.20
273,553.72
190,909.09
100,000.00
0.00

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35

EXERCISE 14, financial analysts' calculations

Interest earned
Interest paid
Initial deposit

5%
6%
25,000

THE 6% LOAN
Year

Principal
beginning
of year
1
25,000.00
2
12,864.08
Total interest paid

Payment
at end of
year
13,635.92
13,635.92

=PMT($B$4,2,-$B$5)
Of which
Interest
Repayment
Paid
of principal
1,500.00
12,135.92
771.84
12,864.08
2,271.84

Savings Account
Year

In savings
End-year
account
interest
at beg. year
earned
1
25,000.00 1,250.00
2
26,250.00 1,312.50
Interest earned
2,562.50

In account
at end of
year
26,250.00
27,562.50

Suppose you took the money out of your savings account and then repaid the account with the payments
the bank wants on the loan. This would generate the following table:
Year

1
2

Money in
savings acct.
beg. Year
0.00
13,635.92

Payment
at end of
year
13,635.92
13,635.92

Interest
Payment
end of year
0
681.80

Total at
end of year
13,635.92
27,953.64

Thus you would have more money in your savings account than if you took the loan from the bank
and kept the account. It's better to take the money from your savings account!

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
ccount with the25payments
26
27
28
29
30
31
32
33
oan from the bank
34
35

EXERCISE 14
Interest earned
Interest paid
Initial deposit

5%
6%
25,000

THE 6% LOAN
Year

1
2

Principal
beginning
of year
25,000.00
12,864.08

Payment
at end of
year
13,635.92
13,635.92

Of which
Repayment
Interest
of principal
1,500.00
12,135.92
771.84
12,864.08

=PMT($B$4,2,-$B$5)

USE THE 5% ACCOUNT TO MAINTAIN THE SAME

BEGINNING OF YEAR PRINCIPAL BALANCES AS THE LOAN
Year

1
2

In savings
End-year
Pay off in
account
interest
principal
at beg. year
earned at end of year
0.00
0.00
12,135.92
12,135.92
606.80
12,864.08

In account
at end of
year
12,135.92
25,606.80

USE THE 5% ACCOUNT TO MAINTAIN THE SAME

BEGINNING OF YEAR PRINCIPAL BALANCES AS THE LOAN
Year

1
2
Discount rate
Present value of loan payments
Present value of loan payments

In savings
End-year
Pay off in
account
interest
principal
at beg. year
earned at end of year
0.00
0.00
12,135.92
12,135.92
606.80
12,864.08

In account
at end of
year
12,135.92
25,606.80

5%
$25,354.78
$25,056.69
Discount
rate

PV of 6%
loan
payments

5.0%
5.1%
5.2%
5.3%
5.4%
5.5%
5.6%
5.7%
5.8%
5.9%
6.0%

$25,354.78
$25,318.89
$25,283.10
$25,247.40
$25,211.79
$25,176.27
$25,140.84
$25,105.50
$25,070.24
$25,035.08
$25,000.00

I've set the repayments

equal in each of the 2 years,
so that your firm has exactly
the same amounts available

Interest
foregone

End-year
opportunity
cost
1,250.00
13,385.92
705.70
13,569.78

PV of
By how much
opportunity
is savings
costs from
preferred
savings account
over loan?
<-- Data table header hidden

$25,056.69
$25,021.15
$24,985.70
$24,950.34
$24,915.06
$24,879.88
$24,844.79
$24,809.78
$24,774.86
$24,740.03
$24,705.29

$298.09
$297.75
$297.41
$297.07
$296.73
$296.39
$296.05
$295.72
$295.38
$295.05
$294.71