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Financial Math Problem

  1. Dec 18, 2011 #1
    1)Hey guys i really need some help on this project I'm doing...i hope theres someone who could help me out and i'd really appreciate it...even if its some kinda hint its still fine...i just need some ideas...here's the question:

    In the spreadsheet for problem1.xls you will nd the speci cations for two projects.
    This includes how much will be received or invested and at which time. Some of the
    values are unknown, speci cally X; t1; t2; t3. Investigate what values for these variables
    will make project 2 preferable to project 1. You may impose restrictions on your
    variables to attain closed form solutions if you like. Assume money is earned at the
    compound interest rate given in the spreadsheet.


    Project 1 Investment Time
    -10000 0
    -10000 1
    -5000 2
    3000 4
    5000 5
    10000 6
    30000 7
    30000 15

    Project 2 Investment Time
    -13000 0
    -18000 1
    10000 2
    X 4
    27000 t1
    21000 t2
    6000 t3

    Compound interest rate 0.1

    2) Present Value of Project 1 = -10000-10000*1.001^(-1)-5000*1.001^(-2)+3000*1.001^(-4)+5000*1.001^(-5)+10000*1.001^(-6)+30000*1.001^(-7)+30000*1.001^(-15)

    Present Value of Project 2 =-13000-18000*1.001^(-1)+10000*1.001^(-2)+X*1.001^(-4)+27000*1.001^(-t1)+21000*1.001^(-t2)+6000*1.001^(-t3)

    3) I'm nopt sure how to advance from this point
    1. The problem statement, all variables and given/known data



    2. Relevant equations



    3. The attempt at a solution
     
  2. jcsd
  3. Dec 18, 2011 #2

    Ray Vickson

    User Avatar
    Science Advisor
    Homework Helper

    If your compound interest rate is yearly (that is, 10% per annum) and your times are in years, you should have factors like 1.10^(-2), 1.10^(-4), etc. The formula you wrote assumes an interest rate of (1/10)% per annum, which is awfully small. Anyway, you are supposed to vary X4, t1, t2 and t3 to find values that give NPV(Proj1) > NPV(Proj2), etc. Personally, I would take the advice given, and get closed-form formulas for the values of the NPVs, or at least, as close to closed-form as I could get. For example, you can set y2 = 27000*1.1^(-t1), y2 = 2100*1.1^(-t2), etc. Now NPV(Proj2) is a simple linear function of x, y1, y2 and y3. If you assume that 4 < t1 < t2 < t3 you have some inequalities between x, y1, y2 and y3.

    RGV
     
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