DARDEN fit uvsi37 BUSINESS PUBLISHING Jun 1.2011 ‘UNIVERSITY¢/VIRGINIA. DEVELOPING FINANCIAL INSIGHTS: E (FV) AND A PRESENT VALUE (PV) APPROACH Base Case Starting Point Most everyone is familiar with the concept that money placed in a savings account will grow to a larger amount as the years pass if the money in that account eams interest at a specified annual compounded rate. For example, $500 invested in a savings account that earns 10% interest compounded annually will grow to become $550 (i.c., $500 1.10) after one year, $605 (i.e., $550 * 1.10) after two years, and $665.50 (i.e., $605 * 1.10) after three years." Think about the numerical example just depicted. It took three sequential calculations to arrive at the $665.50 answer—one calculation for each year involved. If the question had been posed as involving 12 years or even 25 years, a multitude of tedious, repetitive calculations would have been required. Is there a shortcut? Yes. If we take the 1.10 multiplier amount from each of the three parenthetical notations above and simply multiply them together—1.10 1.10 x 1,10—we get a numerical factor of 1.331. So, if some reference book could provide us with the 1.331 multiplier as being applicable to a 10% situation over three years, all we would have to do is take the initial $500 amount put into the savings account and multiply it by 1.331 to get the very same answer as above—$665.50. Are there reference materials that provide such multipliers for a variety of interest and years combinations? Yes, there are, and they are referred to as future value (FV) factors. Such reference materials are useful because no matter the initial amount invested, a specified combination of time and interest will always have the same multiplier effect. Thus, future value factor tables are readily available, depicting a number of possible different interest rates along. one axis and a number of different years along the other.’ In fact, Exhibit 1 presents just such a * The 1.10 multiplier comes from the fact that in one year there will be 100% of that year's starting monetary ‘amount plus an additional 10% duc to a year’s worth of interest having becn accumulated at a 10% rate, Thus, 104 + 10% = 110%, which converts to an arithmetic multiplier of 110 This case explores cash flows on an annual basis. Appendix I explains what to do when cash flows occur on a monthly or quarterly basis, ‘This ease was prepared by Professor Mark Haskins. It was written as a basis for class discussion rath illustrate effective or ineffective handling of an administrative situation. Copyright © 2011 by the Univer Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to sales(@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or atherwise—without the permission of the Darden School Foundation,UVS137 table. In it we can find the 10% column and the three-years row and find the multiplier amount at the intersection of those two table coordinates, and it is 1.331—the same as we determined it should be. Moreover, if we were using a financial calculator or Excel, the embedded programs in those tools would derive the exact same multiplier once we entered the data pertaining to years and interest rate, Can We Reverse the Flow of Time? In business, the basic question posed above often requires us to reverse the focus. For example, the question might be some form of “My customer is willing to pay me $665.50 in three years; what is the equivalent monetary amount, as of today, of that future receipt?” Pause for just a moment—the same basic interplay of time and interest described in the first example must be in play in this scenario also...right? Of course, but instead of a current invested ‘monetary amount growing into a larger future amount due to the compounding of interest, we must now work with a stipulated future monetary amount and in essence, unwind, roll back in time, reverse the compounding of interest phenomenon, In this instance, we are being asked to ascertain the present value (PV)—the value today—of a future monetary amount, using the relevant interest and year information. To do that, the process is simply the reverse of what we did carlier. So, if the relevant interest environment is 10% and the number of years is three, we execute the following three calculations: 1, $665.50 + 1.10=$605 2. $605 + 1.10=$550 3. $550 = 1.10 $500 Thus, receiving $665.50 in three years, when the interest rate environment is 10%, is equivalent to receiving $500 today. In short, this has to be true because as we saw earlier, if we invest $500 today in a savings account that pays 10% interest, that savings account balance will grow to become $665.50 in three years. Another way to state this is this: If, over the next three years, relevant interest rates are 10%, the economic value of $665.50 in three years is exactly equal to $500 today. ‘As before, this can become a laborious series of calculations if the number of years involved is substantial. And, just as before, there is a shortcut, Mathematically, whereas the compounding of interest phenomenon was a multiplicative mathematical task, the unwinding of a compounded interest phenomenon must be a divisive mathematical task. Specifically, we findUVS137 that: 1 = 1.10 = 0.90909, and then 0.90909 + 1.10 = 0.82644, and finally, 0.82644 ~ 1.10 = 0.7513. And, if we take 0.7513 * $665.50, we get $500 (with a bit of rounding). Are there reference materials that provide such factor multipliers for a variety of interest and year combinations when we are seeking to derive the present value of a future monetary amount? Yes, and they contain a host of PV factors. Such reference materials are usefull because no matter the future amount to be received, a specified combination of time and interest will always have the same multiplier effect. Exhibit 2 provides an example of such a reference table. In it, we can find the 10% column and the three-years row and extract the multiplier factor at the intersection of those two coordinates and it is, just as we thought it should be, 0.7513. (Please note that the example depicted at the bottom of the table in Exhibit 2 is an additional one, different from the one discussed here.) Moreover, if we are using a financial calculator or Excel, the embedded algorithms in those tools use the same factor once we have entered into those tools the relevant number of years (three) and interest rate (10%). Moving Beyond Single Ending or Starting Monetary Amounts The two scenarios described above are emblematic of the simplest of situations—they both started with single monetary amounts to be compounded (the Exhibit 1-related example) or discounted (the Exhibit 2-related example). In many personal and business financial situations the reality is that there are multiple cash amounts coming in or going out over the course of a stipulated time period that are pertinent to the sought-after FV or PV. Let’s lay the foundation for those sorts of scenarios. Assume you invest $80 today and at the beginning of each of the next two years for a total of three such deposits, in a 6% savings account. At the end of three years, what will that account have in it? Clearly, we could answer that question by applying the technique and Exhibit 1 factors we described and used in the very first example. That is, we could find the future value of three lump sums—one of which is invested for three years, one of which is in the account for two years, and one of which is invested for only one year. In fact, at the bottom of Exhibit 3, this approach is depicted. But there is an easier, quicker way. Since this scenario involves three applications of the Exhibit 1 factors, we can develop reference materials that accumulate the effects of a variety of multiple applications of Exhibit 1’s factors. Indeed, the Exhibit 3 factors portray such accumulations. Please note that the Exhibit 3 factors are various summations of sequential Exhibit 1 factor amounts for a given interest rate. For this scenario’s three deposits in a 6% savings account, the Exhibit 3 factor is 3.375, which is the sum of the Exhibit 1 6% factors associated with one year, two years, and three years (1.06 + 1.1236 + 1.191, subject to minimal rounding). So 3.375 $80 = $270, the amount to which three (starting today) annual invested amounts of $80 each grow to in a 6% account at the end of three years. Some readers may have anticipated, or be interested to note, that the 0.7513 present value multiplier figure can also be derived by the following: 1 = (1.10)°, which is the same as | = 1.331, which indeed equals 0.7513,UVS137 As before, let's reverse the direction of the time frame. Assume, for example, you are to receive $70 at the end of each of the next three years. The natural question to arise is, what is the single present value monetary amount, as of today, that is equivalent to that series of three receipts? Assuming a 12% interest rate environment, this question can be answered by applying ‘the technique and Exhibit 2 factors that we used in an earlier example. If we were to pursue that approach, we would have to execute three separate calculations for each of the three $70 receipts—that approach is depicted at the bottom of Exhibit 4.‘ But as we were able to do in using Exhibit 1 to develop Exhibit 3, we can use Exhibit 2 to develop Exhibit 4, which in tur can then be used as a shortcut for PV situations with multiple cash flows in the future. Indeed, Exhibit 4 is simply the summation of Exhibit 2 factors for a variety of time periods within an interest rate column. So, in this example, we can casily go to Exhibit 4’s 12% column, three- years row, and find the factor of 2.402, which is the sum (with a bit of rounding) of the pertinent Exhibit 2 factors (0.8929 + 0.7972 + 0.7118). And 2.402 = $70 = $168.14. The interpretation of this present value is as follows: In a 12% interest rate environment, receiving $168.14 today is equivalent to receiving three payments of $70 at the end of each of the next three years. Practice Your FV and PV Skills 1. You just tuned 35 and have been saving for an around-the-world vacation. You want to take the trip to celebrate your 40th birthday. You have set aside, as of today, $15,000 for such a trip. You expect the trip will cost $25,000. The financial instruments you have invested the $15,000 in have been eaming, on average, about 8%. (You may ignore income taxes.) a. Will you have enough money in that vacation account on your 40th birthday to take the trip? What will be the surplus, or shortfall, in that account when you tum 40? (Hint: Exhibit 1 will be useful in answering this question.) b. Ifyou had to, you could further fund the trip by making, starting today, five annual $500 contributions to the account. If you adhered to such a plan, how much will be in the account on your 40th birthday? (Hint: Exhibit 3 and the answer to part (a) above will both be useful in answering this question.) 2. Your company has been offered a contract for the development and delivery of a solar- powered military troop transport vehicle. The request for proposal provides all the necessary technical specifications and it also stipulates that two working, economically feasible prototypes must be delivered in four years, at which time you will receive your only customer payment—a single and final payment of $50 million, Assume a reinvestment interest rate of 18% for all the monies received over the next four years. (You may ignore income taxes.) “ Appendix 2 shows how to adj the year the data in Exhibit 4 for cash flows at the beginning (instead of the end) ofUVS137 a, What lump-sum dollar amount would you be willing to accept today instead of the $50 million in four years? (Hint: Exhibit 2 will be useful in answering this question.) b. Alternatively, what four yearly receipts, starting a year from now, would you be willing to accept? (Hint: Exhibit 4 and the answer to part (a) above will both be useful in answering this question.) 3. The aged but centrally located golf course you manage does not have an in-ground automated water sprinkling system. Instead, to properly water the course, sprinklers and hoses must be repeatedly set, moved, and put away by some of the grounds crew—a tedious and laborious task. If over the next 12 years you project annual savings of about $40,000 from having an automated system, what is the maximum price you would be willing to pay today for an installed, automated golf course sprinkler system? (Assume an interest rate of 6%, and you may ignore income taxes.) a. Redo your calculation using a 10-year time period and $48,000 in annual savings. b. Redo your initial calculation one more time using $50,000 in annual savings for the first six years and $30,000 in annual savings for the next six years 4, The cafeteria you operate has a regular clientele for all three meals, seven days a week You want to expand your product line beyond what you are currently able to offer. To do so requires the purchase of some additional specialty equipment costing $45,000, but you project a resultant increase in sales (after deducting the cost of sales) of about $8,000 per year for each of the next eight years with this new equipment. Assuming a required rate of retum (ie., a hurdle rate) of 8%, should you pursue this opportunity? Why or why not? Do the analysis under two conditions: a, You are part of an income-tax-exempt enterprise b. The enterprise you are part of is subject to a 40% corporate income tax rate, and the straight-line, depreciable life of the equipment you are contemplating purchasing is five years. 5. You are contemplating the purchase of a one-half interest in a corporate airplane to facilitate the expansion of your business into two new geographic areas. The acquisition ‘would eliminate about $220,000 in estimated annual expenditures for commercial flights, mileage reimbursements, rental ears, and hotels for cach of the next 10 years. The total purchase price for the half-share is $6 million, plus associated annual operating costs of $100,000. Assume the plane can be fully depreciated on a straight-line basis for tax purposes over 10 years. The company’s weighted average cost of capital (commonly referred to as WACC) is 8%, and its corporate tax rate is 40%. Does this endeavor present a positive or negative net present value (NPV)? If positive, how much value is being created for the company through the purchase of this asset? If negative, what additional annual cash flows would be needed for the NPV to equal zero? To what phenomena might those additional positive cash flows be ascribable? 6. The final tally is in: This year’s operating costs were down $100,000, a decrease directly attributable to the $520,000 investment in the automated materials handling system put inUVS137 place at the beginning of the year. If this level of annual savings continues for five more years, resulting in six total years of annual savings, what compounded annual rate of return will that represent? If these annual savings continue for nine more years, what compounded annual rate of return will that represent? (You may ignore income taxes.)Exhibit 1 DEVELOPING FINANCIAL INSIGHTS: UVS137 USING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH. Years BUEB REG eavousune uv 19 Future Value Factors for a Single Lump Sum Invested Today for n Years: ™% 1.0200 1.0404 1.0612 1.0824 1.1041 1.1262 1.1487 1a7i7 1.1951 1.2190 1.2034, 1.2682 1.2936 1.3195 1.3459 13728 1.4002 1.4282 1.4568 1.4859 example (assuming 10%). Stort here o% 1.0400 1.0816 1.1249 1.1699 1.2167 1.2653 1.3159 1.3686 1.4233 1.4802 1.5395 1.6010 1.6651 1.7317 1.8009 1.8730 1.9479 2.0258 2.1068 2.1911 Today Tw 5x0 0 Exhibit 1 Factors = (1 + Interest)" Annual Interest Rates % 8% 10% 12% 14% 16% 1.0600 1.1236 1.1910 1.2625 1.3382 1.4185 1.5036 1.5938 1.6895 41.7908 1.8983 2.0122 2.1329 2.2603 2.3966 2.5404 2.6928 2.8543, 3.0256 3.2071 iow $133.10 OR: $100.00 x 1.331 $133.10 (so: PVamount x Exhibit J factor = FV amount) 18% 1.1800 1.3924 1.6430 1.9388, 2.2878 2.6996, 3.1855, 3.7589 4.4355, 5.2338 6.1759 7.2876 8.5994 10.1472 11.9737 14,1290 16.6722 19.6733 23.2144 27.3930 20% 1.2000 1.4400, 1.7280 2.0736 2.4883 2.9860 3.5832 4.2398 5.1598 6.1917 7.4301 ais 10,6993 12.8392 15.4070 18.4884 22.1861 26.6233 31,9480 38.33768. UVS137 Exhibit 2 DEVELOPING FINANCIAL INSIGHTS: USING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH. Present Value Factors for a Single Amount » Years in the Future: Exhibit 2 Factors = 1 + Exhibit 1 Table Factor in the Same Cell ‘Annual Interest Rates % KS H_CSCMOHKCSCM_CMK:SNGK 18K 20% Years 1 0.9804 0.9615 0.9434 0.9259 0.5091 0.8929 0.8772 0.8621 0.8475 0.8333 2 0.9612 09246 0.8900 0.8573 0.8264 0.7972 0.7695 0.7432 0.7182 0.6944 3 0.9423 0.8890 0.8396 0.7938} 0.7118 0.6750 0.6407 0.6085 0.5787 4 0.9238 0.8548 0.7921 0.7350 0.6355 0.5921 0.5523 0.5158 0.4823 5S 0.9057 0.8219 0.7473 0.6806 0.5674 0.5194 0.4761 0.4371 0.4019 6 0.8880 0.7903 0.7050 0.6302 0.5645 0.4856 0.4104 0.3704 0.3349 70.8706 0.7598. 0.6651 0.5835 0.5132 0.3996 0.3538 0.3139 0.2791 8 0.8535 0.7307 0.6274 0.5403 0.4665 0.3505 0.3050 0.2660 0.2326 9 0.8368 0.7026 05919 0.5002 0.4241 0.3075 0.2630 0.2255 0.1938 10 0.8203 0.6756 0.5584 0.4632 0.3855 0.327% 0.2697 0.2267 0.1911 0.1615, 1 0.8043 0.6496 0.5268 0.4789 0.3505 0.2879. 0.2365 0.1954 0.1619 0.1346 120.7885 0.6246 0.4970 0.3971 0.3186 0.2567\ 0.2076 0.1685 0.1372 0.1122 130,730 0,600 0.4688 0.3677 0.2897 0.2292 \0.1821 0.1452 0.1163 0.0935, 140.7579 0.5775 0.4423 0.3405 0.2633 0.2046 0.1597 0.1252 0.0985 0.0779 15 0.7430 0.5553 0.6173 0.3152 0.2394 0.1827 b.1401 0.1079 0.0835 0.0649 16 0.7284 0.5339 0.3936 0.2919 0.2176 0.1631 .1229 0.0930 0.0708 0.0541 17 0.7142 0.5134 0.3714 0.2703 0.1978 0.1456 4.1078 0.0802 0.0600 0.0451, 1B 0.7002 0.4936 0.3503 0.2502 0.1799 0.1300 4.0346. 0.0691 0.0508 0.0376. 19 0.6864 0.4746 0.3305 0.2317 0.1635 0.1161 4.0829 0.0596 0.0431 0.0313, 20 0.6730 0.4564 0.3118 0.2145 0.1486 0.1037 0728 0.0514 0.0365 0.0261 example (assuming 8%): Today a 2 tart here $158.77 eos + $171.47 qui0s « $1959 Gu 208 + OR: $200.00 « 0.7938° = 158.76" (So: PV amount = Exhibit 2 factor x FV amaunt) “cifference between $158.77 and $158.76 due to roundingTable Factors 2% Years 11020 22.060 3 312 4 4208 55.308 6 6436 77.583 a 8755 99.950 wo 11169) Mm 12412 2 13.680 1B 14974 416.293) 117.639 16 19.012 wy 1082 1821841 1 23.297 20 24.783) % 1.000 2122 3.246, 4.416, 5.633, 6.898 324 9.583) 11,006 12.486 14,026 15.627 17.292 19.024 20,825 22.688 24,645. 26.671 23.778 30.969 9. Exhibit 3 DEVELOPING FINANCIAL INSIGHTS: USING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH Future Value Factors for a Series of Invested Amounts at the Beginning of n Years: and All Preceding Cells for that Interest Rate ‘Annual Interest Rates 8% 10K KK 16K BK 20% om 1.060) 2184 3.375| 4.637 5.75 7.394 8.97 ro.aa1 12.181 13972 15.870 ase 20.015 22.276 24.673 27213 23,906 32.760 35.786 38.993, example (using 6%) | ody 1.080) 2.246, 6.336, 7903 9.637 1.498 13.487 15.645, 977 20.085, 23.215 26.152 29,324 32.750 36.450 40.406 44,762 49.473 OR; $80.00 x (So: PV amounts « Exhibit 3 Factor 1100 1.120 2102374 36n1 3.773 5.105 5.353 7.15 9.089) 11.300 13.76 3375 *atference between $259.57 and $270.00 éue to rounding ‘Thi exhibit dene factors for onnutes ove (where the cashflows eecurat he start of each yea! as opposed to an ‘ndinary any situation (where the cash lows occur at the end ofthe year. Most published tables ofthis sort are forthe latter. 1.140 2.840 3971 5.610 7.536 9.730 12233, 15.085, 18337 22.085 26271 31.089 36581 ana 49.980 58.118 67.398 77368 90.025 270.00" 1160 2.506 4.056 58/7 7371 10414 13.240 16519 20321 20738 29.850 35.786 en ‘50.660 59925 70673 gaat 97.603 14.380 133.801 -V amount) 1.180 2572 425 6.154 3a 1a 14327 18.086 252 20755 33.931 ang 49818 59.965 71939 86.068 102.740 sae 145,628 wo Sum of Exhibit 1 Factors for Corresponding Cell 1.200 2.640 4.368, 6a 3.930 1916 15.499) 19.799 24959 31.150 38581 47.497 58.196 71.035 36.442 108.931 wry 153.740 185.688 228.026 UVS137-10- Exhibit 4 DEVELOPING FINANCIAL INSIGHTS: UVs137 USING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH Years BEECRRES RES emvaneune Present Value Factors for a Series of Amounts » Years in the Future: Exhibit 4 Factors = Sum of Exhibit 2 Factors for Corresponding Cell and All Preceding Cells for that Interest Rate ‘Annual Interest Rates 2% 8% 6% OH: NK: MH 16% 18H 20%, 0.980 0.962 0.943 0926 0.909 0.893 0.877 0.862 0.847 0.833 1942 1886 1833 1.783 1736 1690 1647 1605 1566 1528 2884 2775 2673 2577 2487 2.402(~2322 2.246 2174 2.106 3.808 3.630 3.465 3.312 3170 3.037 2.798 2.690 2.589 473 4.452 4.212 3.993 3,791 3.605 3, 3.274 3.127 2991 5.601 5.242 4917 4623 4355 4.111 3.884 3.685 3.498 3.326 6472 6.002 5.582 5.206 4.868 4.564 4.288 4.039 3.812 3.605 7325 6.733 6210 5.747 5.335 4.968, 4344 4.078 3.837 8.162 7.435 6.802 6.247 5.759 5.328 4,946 | 4.607 4,303 4.031 8983 8111 7.360 6710 6145 5.650 5.216 | 4.833 4.494 4,192 9.787 8760 7.887 7.139 6495 5.938 5.453 5.029 4.656 4.327 10.575 9,385 8.384 7.536 6.814 6.194 5.660 5.197 4.793 4.439 11.348 9,986 8.853 7,904 7.103 6.424 5,842 |5.342 4.910 4.533 12.106 10,563 9.295 8244 7.367 6.628 6.002 |5468 5.008 4.611 12.849 11118 9.712 8559 7.606 6811 6142 [5575 5.092 4.675 13.578 11,652 10.106 8851 7.824 6974 6,265 |5.668 5.162 4.730 14.292 12.165 10.477 9.122 8.022 7.120 6.373 |5.749 5.222 4.775 14.992 12.659 10.828 9,372 8201 7.250 6.467 [5818 5.273 4.812 15.678 13.134 11.158 9,604 8.365 7.366 6.550 |5.877 5.316 4.843 16351 13.590 11.470 9818 8514 7.469 6.623 | 5.929 5.353 4.870 example (using 12%): Today $62.50 4.8929 x ‘$55.804".7972 x ‘OR: $7000 x 2402 “© 168.14 (So: PV amount = Exhibit 4 factor x FV amounts) ‘difference between $168.13 and $168.14 due to rounding ‘See Appendix 2 fora discussion of how to use this Exhibit when cash flows beeia immediately.“He UVs137 Appendix 1 DEVELOPING FINANCIAL INSIGHTS: USING A FUTURE VALUE (F) AND A PRESENT VALUE (PV) APPROACH What to Do When Cash Flows Occur on a Monthly or Quarterly Basis All the examples in this case involve annual time periods. It is not unusual for payments or receipts of cash to occur on a monthly or even a quarterly basis. There is an easy adjustment process to accommodate such alternative time frames, All that is required is to note that, unless stated otherwise, interest rates are always assumed (o involve annual compounding. Thus, if the scenario under consideration involves quarterly cash flows, the vertical axes of the tables in Exhibit 1 through Exhibit 4 can be assumed to pertain to the number of quarters (instead of years) and the stated annual interest rate must be divided by 4 (because there are four quarters per year) before picking the appropriate interest rate column to use in the tables. So, if the desire is to ascertain the PV of a series of quarterly payments, beginning at the end of the first quarter, for the next three years, and the pertinent annual interest rate is 16%, these are the two required adjustments for using the tables: 1. The number of periods to use on the tables’ vertical axes is 12 (3 years x 4 quarters per year), 2. The interest rate to use on the tables’ horizontal axes is 4% (16% annual rate + 4 compounding quarters per year) In short, for a quarterly series of cash flows, we adjust the table axes coordinates by scaling up the number of periods by a multiple of 4 and scaling down the interest rate by a divisor of 4. Similarly, for a monthly series of cash flows, we adjust the table axes coordinates by scaling up the number of periods by a multiple of 12 and scaling down the interest rate by a divisor of 12.' " Note: Technically, an interest rate of 16% compounded annually is not equivalent to a 4% rate compounded. quarterly. The reason is that the interest camed on a quarterly basis is itself subject to the next quarter's compounding, quarter after quarter. For example, $100 eaming interest at a 16% annually compounded rate will ‘grow to SII6 at the end of one year. On the other hand, $100 earning interest at the rate of 4% compounded ‘quarterly will grow to $117 at the end of one year. The fact that the two scenarios are not identical is assumed to be immaterial, and thus the adjustments described above aze common when using FV and PV tables. $100 «104 = $04 $106 x 1.04 = $108.16 $108.16 * Lod = $112.49 sii249 x 104 = SuT-12- UVs137 Appendix 2 DEVELOPING FINANCIAL INSIGHTS: USING A FUTURE VALUE (FV) AND A PRESENT VALUE (PV) APPROACH. Adjusting Exhibit 4 for Cash Flows at the Beginning (Instead of the End) of the Year example (using 12%). Today 1 2 3 from Exhibit2 ‘$62.50 8929 x $55.80¢=.7972 x OR: $70.00 x (1.69+1) = $188.30 $70.00 x 2.69 = $188.30 At times, the series of cash flows for which a present value amount needs to be calculated begins at the start of each year as opposed to the end of each year. The discussion and example depicted in Exhibit 4 identifies the cash flows according to this latter pattern. It is not unusual, however, for the series of cash flows to begin immediately as depicted in the following revised Exhibit 4 example. Please note there are still three annual cash flows, they simply now begin at the start of their respective years. Exhibit 4 can still be used to ascertain today’s PV of this series of cash flows. The way to do that involves two steps. First, use the appropriate interest rate column (12% in this example) and use the two-years row, instead of the three-years row as originally done. In Exhibit 4, that factor is 1.69, and it will be used to PV all the cash flow amounts except the very first one. Second, because the first cash flow item occurs today, its PV is equivalent to the cash flow amount itself So, to value it, we simply add 1.0 to the 1.69 factor pertaining to the other cash flow amounts in the example, arriving at an adjusted table factor of 2.69. Using that adjusted factor in the following fashion, $70.00 x 2.69 = $188.30, we get the PV of a series of three annual amounts of $70 each, where the series begins today (immediately), as equaling $188.30. In the above depiction, this is verified by discounting each of the three amounts separately (using Exhibit 2 factors) and obtaining the same total PV amount.