Chapter 4 and 5

TOPIC ::
Discounted Cash Flow Valuation ( Time Value Of Money)

Net Present Value and Other Investment Criteria

Adrian Radityatama (041914353016)

Ricki Setiawan Sulistyo (041914353031)
 Chapter 4
Discounted Cash Flow Valuation ( Time Value Of Money)

THE MBA DECISION

 Mini Case
1.How does Ben’s age affect his decision to get an MBA? Ben Age is
important since he could only work for 40 more years mean the
period of him recieve salary will limited and not last forever.
2.What other, perhaps nonquantifiable, factors affect Ben’s decision to get
an MBA? Non quantifiable factor in my opinion was the risk of
industries where he work and could he maintain his performance at
work while he was studying and finish a lot of homework. He could
be fired from his job if he can’t keep focus.
3.Assuming all salaries are paid at the end of each year, what is the best
option for Ben—from a strictly financial standpoint?
4.Ben believes that the appropriate analysis is to calculate the future value
of each option. How would you evaluate this statement?
5.What initial salary would Ben need to receive to make him indifferent
between attending Wilton University and staying in his current position?
6.Suppose, instead of being able to pay cash for his MBA, Ben must
borrow the money. The current borrowing rate is 4.3 percent. How would
this affect his decision?a
4-3
 Mini Case
There are three options have to be calculated:
1. Keeping his current work for 40 years
Salary = $60,000, tax rate = 26%, because of tax rate, c = $44,400
R (discount rate) = 6.5%
G (growth rate) = 3%
T (the number of period working) = 40
So the PV is = $ 937,474.28
2. Getting the MBA at Wilton University
The factors to consider are: He will receive a job offer for about $110,000 per year, with a
$20,000 signing bonus. The salary at this job will increase at 4 % per year. Because of the
higher salary, his average income tax rate will increase to 31 %.
Salary = $110,000, tax rate = 31%, so, C = $75,900
R (discount rate) = 6, 5%
G (growth rate) = 4%
T (the number of period working) = 38 (40 years – 2 years)
So the PV is = $ 1,806,116.4
3. Getting the MBA at Mount Perry College
The factors to consider are: he will receive an offer of $92,000 per year upon the graduation,.
The salary at this job will increase at 3.5 % per year. His average tax rate at this level of
income will be 29 %.
Salary = $ 92,000, tax rate = 29%, so, C = $ 65,320
R (discount rate) = 6, 5%
G (growth rate) = 3, 5%
T (the number of period working) = 39
So the PV is = $1,463,821.2
4-4
 Mini Case
1. Keeping his current work for 40 years
There are several factors to be considered to calculate the future values (FV) of the first
options are: His annual salary at the firm is $60,000 per year, and his salary expected
to increase at 3 % per year until retirement, his current average tax rate is 26 %.
In this case, to get the present value (PV), we can use the formula of growing annuity.
Salary = $60,000, tax rate = 26%, because of tax rate, c = $44,400
G (growth rate) = 3%
T (the number of period working) = 40
So the FV is = $11,639,750.53
2. Getting the MBA at Wilton UniversityThe factors to consider are: He will receive
a job offer for about $110,000 per year, with a $20,000 signing bonus. The salary at
this job will increase at 4 % per year. Because of the higher salary, his average income
tax rate will increase to 31 %.
Salary = $110,000, tax rate = 31%, so, C = $75,900
G (growth rate) = 4%
T (the number of period working) = 38
So the FV is = $19,771,099.95
3. Getting the MBA at Mount Perry College
The factors to consider are: he will receive an offer of $92,000 per year upon the
graduation,. The salary at this job will increase at 3.5 % per year. His average tax rate
at this level of income will be 29 %.
Salary = $ 92,000, tax rate = 29%, so, C = $ 65,320
G (growth rate) = 3, 5%
R = 6.5%
T (the number of period working) = 39
So the FV is = $17,065,646.13
4-5
Chapter 5

Net Present Value and Other Investment Criteria

BULLOCK GOLD MINING

CASE OVERVIEW ..

Alma Garrett
(CFO)
9-7
ALMA’S CASH FLOW ESTIMATION ..

9-8
QUESTIONS OF THE CASE

• Payback Period

• IRR & MIRR

• NPV (Net Present Value)

• Profitability Index

• Financial Decision
PAYBACK PERIOD (SPREADSHEET)

Formula Payback Period In D13 = - D4/(C5) + 4

Formula Disc Payback Period in F13 = - F8/(E9) + 5
DISCOUNTED PAYBACK PERIOD

Year Initial Investment Discounted Cashflow

0 $950,000,000
1 $190,000,000/(1.12)1 = $169,642,857.1
2 $215,000,000/(1.12)2 = $171,396,683.7
3 $225,000,000/(1.12)3 = $160,150,555.8
4 $285,000,000/(1.12)4 = $181,122,652.3
5 $275,000,000/(1.12)5 = $156,042,385.3
6 $235,000,000/(1.12)6 = $119,058,313.5
7 $205,000,000/(1.12)7 = $92,731,589.14
8 $165,000,000/(1.12)8 = $66,640,732.62
9 -$75,000,000/(1.12)9 = -$27,045,751.87
THE CONCEPT OF NPV
NPV

NPV Formula in Ms. Excel = NPV (rate,values)

NPV Formula in after correction = NPV (rate,values) + Initial cost

NPV = $139,740,017.61
IRR

IRR Formula in Ms. Excel = IRR (Values)

IRR = 16%
 MIRR

MIRR Formula in Ms. Excel = MIRR (values, finance rate, reinvest rate)

MIRR = 14%
PROFITABILITY INDEX

Profitability Index = 1.15

FINANCIAL DECISION
Thank You