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#1
10-12-2011, 03:58 PM
 thefox916 Member CAS SOA Join Date: Jun 2011 Favorite beer: Any type of IPA Posts: 57
NPV Question

Hello All,

Some help would be appreciated:

A company pays \$120,000 to purchase a property. The company pays \$3,000 at the end of each
of the next 6 months to renovate the property. At the end of the eigth month, the company sells
the property for \$150,000. Find the net present value of this project for the company at an annual
eff ective rate of 8%.

The Answer is supposed to be 4896.52

I get 4900.80

This what I did:

Solved for i-monthly= .00643

-120000-3000a(6,.00643)+150000(1.00643)^-8
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#2
10-12-2011, 04:49 PM
 LifeIsAPoissonProcess Member SOA Join Date: Aug 2010 Studying for C Posts: 3,387

Probably rounding error. Using the CF function on a BA2+:

CF 0 = -120,000
CF 1 = -3,000, F1 = 6
CF 2 = 0, F2 = 1
CF 3 = 150,000, F3 = 1

NPV = (1.08)^(1/12), -1, *100

Down Arrow

Enter.
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#3
10-12-2011, 04:50 PM
 Anthemyst Member SOA Join Date: Jun 2010 Location: Springfield, MA Studying for MLC Posts: 6,851

Rounding error, pure and simple. You could store the i-monthly in your calculator so it goes to 15 digits or whatever, that's what I did and I got the 'correct' answer, redid your calculations and got 4900.8 as well. The exam would probably round that to 4900 anyway, I wouldn't worry about it.
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#4
10-12-2011, 04:59 PM
 LifeIsAPoissonProcess Member SOA Join Date: Aug 2010 Studying for C Posts: 3,387

Quote:
 Originally Posted by Anthemyst Rounding error, pure and simple. You could store the i-monthly in your calculator so it goes to 15 digits or whatever, that's what I did and I got the 'correct' answer, redid your calculations and got 4900.8 as well. The exam would probably round that to 4900 anyway, I wouldn't worry about it.
+1 ... store and recall are your friends. If you want to watch an inspirational movie on the importance of not rounding, I would watch Office Space.
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#5
10-13-2011, 01:59 PM
 thefox916 Member CAS SOA Join Date: Jun 2011 Favorite beer: Any type of IPA Posts: 57

Thank you!
__________________
............
P FM C

These tests were designed by humans, therefore they can be destroyed by humans!
#6
10-13-2011, 02:22 PM
 thefox916 Member CAS SOA Join Date: Jun 2011 Favorite beer: Any type of IPA Posts: 57

How about help on another one?

Chris is investing 1,000 at the beginning of each year into Fund A. Fund A earns interest at a nominal interest rate of 12% compounded monthly. Fund A pays Chris interest monthly. Chris reinvests that interest in Fund B earning an annual eff ective rate of 8%. Calculate the total amount in Fund A and Fund B after 10 years.

The manual has an answer of: 18774.42

What I did:

I applied the formula AV= P(n + i([s(n+1,j)-(n+1)]/j)

Where:
n=10
i= .12/12 = .01
j= .08/12 = .00666667
P=1000

Resulting in an AV of: 10561.16
__________________
............
P FM C

These tests were designed by humans, therefore they can be destroyed by humans!

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