Formulas
An objective of an organization is
maximize profit/ minimize cost
If in 4 years, Sam can receive $50,000 at the interest rate of 2%. What is her PV?
$46,192
Present value is affected by
FV, Time and interest rate
How do we calculate Total revenue, total cost and total profit?
Total Revenue (TR) = P*Q
Total Cost (TC) = Total Fixed Cost + Total Variable Cost
Total Profit = TR - TC
A preferred stock pays a perpetual dividend of $2500 at the end of each year with an interest rate of 6%. What is PV?
$41,667
If NPV > 0, you should continue with your business. T/F
True
How do we calculate Accounting profit and Economic Profit?
Acct profit = TR - TC or TR - Explicit cost
Economic profit = Accounting Profit - Opportunity Cost or Accounting Profit - Implicit Cost
What is the present value of $200,000 in 6 years at a discount rate of 4%?
158,063
Money received now is more valuable than money received later
True
PV = FV / (1+i)^t
Janet spends $30,000 per year on painting supplies and storage space. She recently received two job offers from a famous marketing firm—one offer was for $110,000 per year and the other was for $80,000. However, she turned both jobs down to continue a painting career. If Janet sells 25 paintings per year at a price of $8,000 each. What is her accounting profit?
True
How do we calculate the PV of a firm at the end of the next t year?
∑ r(t+i) ^t
What is the maximum amount you would pay for an asset that generates an income of $250,000 at the end of each of five years if the opportunity cost of using funds is 8 percent?
998,177.5
List everything that would cause a decrease in PV
Increase in time
Increase in interest rate