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Discounted payback using barcode integrating for none control to generate, create none image in none applications.printing upc-a c# Investment efficiency Jasper Reports Sensitivities The first three items ar none none e what I term economic indicators for the main case. These complement the primary economic indicator which is NPV. The final item makes the point that many cases need to be investigated in order to understand the effect of different assumptions.

Each new case will have its own set of economic indicators.. The five financial building blocks Part 3: Practical examples I will now take the econ omic value model and show how it can be applied in three different situations. I will use these examples to show how the economic indicators can add further insights on top of what is achieved by simply considering value. Example 1: Uncle Norman s birthday treat Uncle Norman talks to you on your 15th birthday.

This is the generous offer that he makes:. Everybody can have just none for none one special birthday. You know that on that day you will get a super present from me. Do you want this to be on your 16th, your 18th or your 21st birthday The longer you wait, the more you will get and on your other birthdays I will still give you your usual $500.

At 16 you can have $10,000 but wait until you are 18 and this will be $12,500. If you wait until you are 21, I ll give you $16,000. .

Which should you choose if your time value of money was 10% The first step is to calculate the cash flows for the various options. These will be as follows:. 16th birthday $10,000 $5 none none 00 $500 17th birthday $500 $500 $500 18th birthday $500 $12,500 $500 19th birthday $500 $500 $500 20th birthday $500 $500 $500 21st birthday $500 $500 $16,000. Special day 16th birthday 18th birthday 21st birthday The next step is to calc none for none ulate the appropriate discount factor. The cash flows are all exactly one year apart and the first is in one year s time. This means we can simply take the factors from our discount factors table above.

We then multiply the various cash flows by the discount factors to calculate their present values:. 16th birthday Discount f actor 0.909 17th birthday 0.826 18th birthday 0.

751 19th birthday 0.683 20th birthday 0.621 21st birthday 0.

564. Building block 1: Economic value Present value of cash fl ows (= cash flow discount factor). 16th birthday 18th birth none for none day 21st birthday $9,090 $455 $455 $413 $413 $413 $376 $9,388 $376 $342 $342 $342 $310 $310 $310 $282 $282 $9,024. All that remains to be d one is to work out the present value of each of the three options. This is simply the sum across each row. The results are: 16th birthday option: NPV $10,813 18th birthday option: NPV $11,190 21st birthday option: NPV $10,920 This analysis shows a priority order of 18th birthday, 21st birthday and finally 16th birthday.

There is not a lot of difference in the numbers so one might well want to test the model a little further and in particular, to test what is driving the decision. The above table has been computed line by line using discount factor tables. This approach was adopted in order to make the various steps absolutely clear.

It is, however, generally preferable to build a spreadsheet model to carry out any analysis. This allows one to avoid small rounding errors8 and, more importantly, allows one to carry out what if tests. Two key assumptions to investigate concern the discount rate and the present on non-special birthdays.

For example, a higher time value of money would favour the 16th birthday option. This is because the 16th birthday option gives you the large sum of money earlier and increasing the time value of money is giving the signal that money in the future is relatively less attractive. We can use a trial and error approach9 to find what time value of money makes the 16th birthday option exactly equivalent in present value to the 18th birthday option.

It turns out that at a discount rate of 12.39% the 16th and 18th birthday options are each worth $10,486. At any rate above this, the.

A spreadsheet model of t none none he Uncle Norman s birthday treat scenario shows that the correct NPVs (to the nearest dollar) are: 16th birthday option: NPV $10,814 18th birthday option: NPV $11,193 21st birthday option: NPV $10,927. The go l seek function c an also be used if one wants to find the answer as soon as possible. I r come goal ek n ion n o e d f ns nd he wer s on s o sibl . recommend, however, that when you are investigating such a situation you should adopt a trial and error approach.

This gives a much fuller picture of how the decision you are investigating is influenced by changes in the assumptions..
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