Current ratio = Current asset / Current liabilities
1.5 = $3M / Current liabilities
Current liabilities = current assets / current ratio = $3M / 1.5
Current liabilities = $2M
Quick ratio = (Current assets – Inventories) / current liabilities
1 = $3M - Inventories / $2M
Inventory = $3M - $2M = $1M [Quick ratio = ($3M - $1M = $2M) / $2M = 1]
4-1 FV of Single Amount
If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years?
Formula from Excel FVn=PV (1+I) n where FV = Future value PV = investment I = interest rate N = period
$10,000 (1.10) 5 = $16,105.10
FV = $16,105.10.
4-2 PV of Single Amount
What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually?
Formula from Excel PVn = FV/(1+I)n PV = $5,000/(1.07)20 = $1292.095
PV = $1,292.10.
4-6 FV of Ordinary Annuity
What is the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this were an annuity due, what would its future value …show more content…
The appropriate interest rate is 8%. (Hint: It is fairly easy to work this problem dealing with the individual cash flows. However, if you have a financial calculator, read the section of the manual that describes how to enter cash flows such as the ones in this problem. This will take a little time, but the investment will pay huge dividends throughout the course. Note that, when working with the calculator’s cash flow register, you must enter CF0 = 0. Note also that it is quite easy to work the problem with Excel, using procedures described in the Chapter 4 Tool Kit.) Year | Cash Stream A | Cash Stream B | 1 | $100 | $300 | 2 | 400 | 400 | 3 | 400 | 400 | 4 | 400 | 400 | 5 | 300 | 100 |
Cash Stream A Formula from Excel =NPV (.08, {100,400,400,400,300})
$1,251.25
Cash Stream B Formula from Excel = NPV (.08, {300,400,400,400,100})
$1,300.32
b. What is the value of each cash flow stream at a 0% interest rate?
Cash Stream A Formula from Excel =NPV (.00, {100,400,400,400,300})
Solution: $1,600.00
Cash Stream B Formula from Excel = NPV (.00, {300,400,400,400,100})
Solution: