EOM4 Task 3: how to apply interest and PV?
A couple of questions:
1. How do you decide what discount rate to use in order to calculate present value?
2. How do you use the three columns (J:L) under "Interest Income"? I'm thinking I first need to add up the funds at the beginning of the year, as BOY reserve + premium - underwriting expenses - commissions and bonuses, assuming the latter are paid at the beginning of the year. (I'm using column J for this, despite the heading.) Then I multiply by the interest rate to get returns for the year, on the assumption that all available funds at the beginning of the year are immediately invested, until the end of the year.
I don't understand why we need three columns for this rather than two. In particular, I don't understand what is intended by the "During Year" and "Total" columns (K:L) under "Cash Flow". I see that in the "Alternate Presentation" section at the bottom of the worksheet, the "Total" column is pulled into the "Investment Income" row (row 197), so column L ought to contain the actual interest income. But then what goes in column K?
With the possible exception of bonuses, I can't think of any cashflows that actually occur throughout the year, rather than being assumed to occur either at the beginning or the end.
Edit: okay, the notes appear to be telling me to use the assumed interest rate as the discount rate; and they have a description for the "Interest Income" columns that leads to the same result I'd had. Good.
Last edited by Atropellador; 09-02-2008 at 12:36 PM..