### Create a StudySoup account

#### Be part of our community, it's free to join!

Already have a StudySoup account? Login here

# Class Note for EconS 350 with Professor Painter at WSU 02

### View Full Document

## 17

## 0

## Popular in Course

## Popular in Department

This 45 page Class Notes was uploaded by an elite notetaker on Friday February 6, 2015. The Class Notes belongs to a course at Washington State University taught by a professor in Fall. Since its upload, it has received 17 views.

## Similar to Course at WSU

## Popular in Subject

## Reviews for Class Note for EconS 350 with Professor Painter at WSU 02

### What is Karma?

#### Karma is the currency of StudySoup.

#### You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!

Date Created: 02/06/15

Time Value of Money Investments that extend over a period of time Future Value Interest the amount of money that can be earned on the investment each year expressed as percent of total investment Situation 1 What is the value of 1000 invested today earning 8 interest annually at the end of three years 2 amtMal interest 1000 Year 0 1 2 3 End of Value Year 1 100000 x 108 108000 Year 2 108000 x108 116640 Year 3 116640 x108 125971 This process is called Compounding Other ways to get the same answer Initial Amount Invested x 1 in where i interest rate n number of years 1000 x 1083 1000 X 125971 125971 Amount Invested x Table 2 factori n where i interest rate n number of years 1000 X 12597 125970 Cautionll Whenever using a Table factor you must determine what point in time the table starts the investment Year 0 L 2 3 In Table 2 the investment starts immediately Situation 2 How much money will you have accumulated at the end of 4 years if you invest 1000 per year for the next 4 years at 10 annual interest The investments start at the end of eachyear 1000 4121000 gt I 1000 1000 Year 0 1 2 3 4 FV Year1 Year2 Year3 Year4 100000 X 1103 100000 X 1102 100000 X 110 1000 X 100 33100 21000 10000 00000 464100 Another way Amount invested each year x Table 3 factori n 1000 X 46410 464100 In Table 3 investments start at the end of year Situation 3 Same as Situation 2 except the investments start at the beginning of each year F I F 1000 I 1000 b I 1000 1000 Year 0 1 2 3 4 FV Year1 Year2 Year3 Year4 100000 X 1104 100000 X 1103 100000 X 1102 100000 X 110 146410 133100 121000 110000 510510 Another way Amount invested each year x Table 3 factori n1 1000 1000 X 61051 1000 510510 Present Value Current dollars are worth more than future dollars due to 1 Alternative profitable uses for current dollars 2ln a on 3 Uncertainty Interest discount factor the annual percentage decrease one is willing to discount future earnings to receive the money now The process of determining the present value of a future amount of money is called Discounting Situation 4 What is the present value of 1 25970 to be received in 3 years assuming an 8 discount rate 125370 Yea Y 0 1 2 3 We know FV PV X 1 in Thus PVFV1in or FVX 1 1 i 1 83 2 125970 X1 1 12597 12597O X 2 125970 x 79383 1ooo Another way Amount to be received in n years x Table 4 factori n 125970 X 79383 1000 Table 4 assumes payment made at end of the year End of year 3 Situation 5 What is the present value of 1 000 per year to be received over the next 4 years assuming a 10 discount rate The payments are received at the end of the year Year1 Year2 Year3 Year4 1000 1000 1000 1000 110 1102 1103 1104 PV 90909 82645 75131 68301 316986 Another way Amount to be received each year x Table 5 factori n 1000 X 31699 316990 Table 5 assumes payments received at end of year Situation 6 Same as Situation 5 except payment is received at the beginning of each year 4 4 I 4 1000 1000 1000 1000 I Year 0 1 2 3 4 Year1 Year2 Year3 Year4 1000 1000 1000 1000 1000 110 1102 1103 PV 100000 90909 82645 75131 348685 Another way Amount to be received each year x Table 5 factori M 1000 1000 X 34869 348690 Table 5 assumes payments received at end of year Review Future Value of set amount 5000 invested 6 years Compound rate of 7 5000 gt Year 0 1 2 3 4 5 5000 x 1 076 5000 x 15007 mm 2 750305 Future Value of an annuity 5000 invested each year for 5 years at 7 compound rate Invest the 5000 at the end of each year 5000 Yea rs 0 1 2 3 4 5 5000 x 57507 1721ch 3 2875350 Table 3 assumes payments invested at the end of each year If payment begins at the beginning of the year 5000 5 Years 0 1 2 3 4 TabLe 3 factor a w 1 1000 x 5000 71533 1000 x 5000 3070050 Present Value of a set amount 10000 to be received in 5 years Discount rate of 6 10000 x 74720 WW 4 747200 1 100 5 10000 x 10000 x 75720 747200 Present Value of an annuity Receive 7000 at the end of each year for 10 years with a desired 8 return on your investment 7000 x 67101 TabLe 5 4537030 YOU WON THE LOTTERY 1000000 he State sells lottery tickets and brings in income In this example assume that the State sells 1000000 worth of tickets minus expenses What you really won 50000 a year over 20 years owever 25 of your winnings goes to taxes 50000 x 1 25 37500 over 20 years Using a discount rate of 8 over 20 years payments at beginning of the year Present Value 37500 X 106036 397635 What has happened to the 1000000 the State owes you They give you your first 50000 payment and end up with 950000 Assume they invest that money at 8 First year of investment the investment returns 950000 x 08 76000 You get 50000 The State gets 26000 This is a net return to the State of 2737 on the 950000 you supposedly won Compounding this out you will find that at the end of 19 years you are paid off and the State has made 1586798 off of your winnings Capital Budgeting Net Present Value Analysis Invest 10000 in a machine 3year life Salvage value at end of 3 years is 4000 Next best alternative returns 10 per year For discount purposes all revenue and expenses occur at year end Year 1 Year 2 Year 3 Revenue 12000 15000 11000 Expense 9000 10000 9000 Calculate the NPV of the investment Net Present Value of Investment 10 Discount Rate Net Discount Cash Rate Present Revenue Expense Flow 10 Value Year 0 10000 10000 100 1000000 Year 1 12000 9000 3000 110 272727 Year 2 15000 10000 5000 121 413223 Year 3 11000 9000 2000 1331 150263 Year 3 SV 4000 4000 1331 300526 Total 42000 38000 4000 136739 Net Present Value 136739 Year 0 Year 1 Year 2 Year 3 Year 3 SV Total Net Present Value of Investment 1679 Discount Rate Net Discount Cash Rate Present Revenue Expense Flow 1679 Value 10000 10000 100 1000000 12000 9000 3000 11679 256871 15000 10000 5000 1364 366569 11000 9000 2000 1593 125549 4000 4000 1593 251099 42000 38000 4000 88 Net Present Value 088 Internal Rate of Return 1679 Assume that an acre of Christmas trees is projected to return 8000 after four years If the cost of maintenance is 1000 per year for years 1 through 4 how much can a person afford to spend to establish this acre of Christmas trees assuming heshe wants to return at least 10 percent on the investment Net Present Value of Investment 10 Discount Rate Net Discount Cash Rate Present Revenue Expense Flow 10 Value Year 0 100 Year 1 0 1000 1000 110 90909 Year 2 0 1000 1000 121 82645 Year3 0 1000 1000 1331 75131 Year 4 8000 1000 7000 1464 478142 Total 8000 4000 4000 229457 Net Present Value of Investment 10 Discount Rate Net Discount Cash Rate Present Revenue Expense Flow 10 Value Year 0 229457 229457 100 229457 Year 1 0 1000 1000 110 90909 Year 2 0 1000 1000 121 82645 Year3 0 1000 1000 1331 75131 Year 4 8000 1000 7000 1464 478142 Total 8000 4000 4000 000 That s All

### BOOM! Enjoy Your Free Notes!

We've added these Notes to your profile, click here to view them now.

### You're already Subscribed!

Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'

## Why people love StudySoup

#### "I was shooting for a perfect 4.0 GPA this semester. Having StudySoup as a study aid was critical to helping me achieve my goal...and I nailed it!"

#### "When you're taking detailed notes and trying to help everyone else out in the class, it really helps you learn and understand the material...plus I made $280 on my first study guide!"

#### "I was shooting for a perfect 4.0 GPA this semester. Having StudySoup as a study aid was critical to helping me achieve my goal...and I nailed it!"

#### "Their 'Elite Notetakers' are making over $1,200/month in sales by creating high quality content that helps their classmates in a time of need."

### Refund Policy

#### STUDYSOUP CANCELLATION POLICY

All subscriptions to StudySoup are paid in full at the time of subscribing. To change your credit card information or to cancel your subscription, go to "Edit Settings". All credit card information will be available there. If you should decide to cancel your subscription, it will continue to be valid until the next payment period, as all payments for the current period were made in advance. For special circumstances, please email support@studysoup.com

#### STUDYSOUP REFUND POLICY

StudySoup has more than 1 million course-specific study resources to help students study smarter. If you’re having trouble finding what you’re looking for, our customer support team can help you find what you need! Feel free to contact them here: support@studysoup.com

Recurring Subscriptions: If you have canceled your recurring subscription on the day of renewal and have not downloaded any documents, you may request a refund by submitting an email to support@studysoup.com

Satisfaction Guarantee: If you’re not satisfied with your subscription, you can contact us for further help. Contact must be made within 3 business days of your subscription purchase and your refund request will be subject for review.

Please Note: Refunds can never be provided more than 30 days after the initial purchase date regardless of your activity on the site.