A new copy of a book costs $118. You buy it at that price and then after one month you sell it for $80. You could have put your money in a 1 month CD that pays 2.4% annually.
In present value terms, how much did you pay on the day of purchase to “rent” this book for one month?
Thanks for the help.
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Pay 118 in Jan, get 80 in Feb.
So you need to bring everything to PV terms.
Jan 118 is already PV. 80 in Feb is not, so discount $80 by 2.5%/12.
80/(1+.2%) = 79.84032
118 - 79.84032 = 38.15968
Its sometimes helpful to use +/- for cash in and cash out. So it'd be
Jan -118 Feb 80
PV Jan -118
PV Feb 79.84032PV Net -38.1597
Great, thank you for the answer, that is what I was thinking.
I really do not have a clue. I just needed help with my homework and will agree with any answer someone posts.
PV is -38.17. He said 2.4% not 2.5%. Always check, recheck your numbers :-)
pwned.
Something about banker chicks really turn me on.
Damn, I was really hoping you corrected me. But it looks like the 2.5% above was a typo, my math is using 2.4%/12, which correct, not sure how you got 38.17.
Oh good god, I can't believe I have to point out the obvious. To the naked eye, it appears like this:
2.4%/12 = .2% (rounded) 2.5%/12 = .2% (rounded)
To a more astute eye, the issue lies in your inconsistent use of significant figures:
2.4%/12 = 0.002000 2.5%/12 = 0.002083
Hence, 38.17.
I think you're mistaken, Marcus is right.
CF0 = -118 Cash-Out CF1 = 80 Cash-In
Discount Rate = 2.4% / 12 = .2000%
PV of CF0 = -118 PV of CF1 = 80/(1.002) = 79.8403
PV = -118 + 79.8403 PV = -38.1597 PV = -38.16
Using 2.5% as the discount rate is what brings you to a PV of -$38.17.
LOL
Haha cmon now aadpepsi where is the attention to detail?
I know. It's tragic :-)
Can someone clear this question up for me?
From what I can understand, the person could've invested the $120 at 2.4% annual rate so that's 1.002* 120 = $120.24
Instead the person got $80 back, so that's 120.24 - 80 = $40.24 that the person missed out on, or -40.24.
Can someone explain why the 80 is being discounted to PV instead of the 120 into FV?
Thanks
The question was what the cost to "rent" the book would be in present value terms, so you take all CF associated with the book and PV it.
Why are you compounding $118 (not 120 btw) by the CD rate?
Not buying the book and investing it into a CD has absolutely nothing to do with anything. The CD rate is only shown as an opportunity cost so you know what to discount it by.
Cool cool. I get it now. Thanks
Is this some sort of fucked up banker flirting? You guys go back and forth correcting each other to the thousandths until the tension boils over and you ravage each other. The next day, you're wondering why your ass has an imprint of a HP12c.
I'd be lying if said I didn't feel some sexual tension come from the general vicinity of ms. aadpepsi.
I think she digs my use of 5 decimals.
I noticed you, noticing me and I just wanted to put you on notice, that I noticed you too.
OMG, is that line from a movie?
It's a line from an Akon song:
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Saddest topic ever.
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