CFA Practice Question

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CFA Practice Question

An investment promises to pay $1,000 one year from today, $1,500 two years from today and $2,000 three years from today. If the required rate of return is 11% compounded annually, what is the value of the investment today?
Correct Answer: $3,580.72

We must calculate the present value of the 3 investments separately and then add these amounts.

As usual, we use the formula PV = FV / (1 + r)N

1,000/(1.11)1+ 1,500/(1.11)2 + 2,000/(1.11)3 = 900.90 + 1217.4 + 1462.3 = $3,580.71

You can also use the Cash Flow Keys on the Texas Instrument BA Plus II:

The cash flows are designated CF0, C01, C02, and so on.
The frequency of the cash flow is Fnn. If it occurs only once, F01 will be displayed.
CF0 is displayed as a value from a previous calculation. Clear it using 2nd CLR WORK and enter 0 as your first cash flow.
The final amount is the net present value (NPV).

All the keystrokes are given below. Keystrokes: Display
2nd QUIT: 0.00
CF: CFo = previous value
2nd CLR WORK: CFo = 0.00
arrow ENTER: CFo = 0.00
DownArrow: C01 = 0.00
1000 ENTER: C01 = 1,000.00
DownArrow: F01 = 1.00
DownArrow: C02 = 0.00
1500 ENTER: C02 = 1500.00
DownArrow: F02 = 1.00
DownArrow: C03 = 0.00
2000 ENTER: C03 = 2000.00
NPV: I = 0.00
11 ENTER: I = 11.00
DownArrow: NPV = 0.00
CPT: NPV = 3,580.72

User Contributed Comments 5

User Comment
Beret Or on the HP12C:
0 [g][CF0]
1000 [g][CFj]
1500 [g][CFj]
2000 [g][CFj]
hpersey Another quick way on the Texas BA II Plus Pro is to solve for individual cash flows, then sum their present values (according to the addivity principal of cash flows) like so:

STO, 1


STO + 1


STO + 1

RCL 1 will give you the answer, 3580.72!
johntan1979 Your "quick" is slower than the CF method, and prone to errors. By right, you SHOULD clear the TVM menu before the next batch of numbers, and you forgot each round to enter the I/Y.
chipster Why would the cash flows not be designated as PMT using a financial calculator, as opposed to a PV? thanks
gerdvar PMT or payment refers to equal payments, ie. multiple yet equal individual cashflows which is PMT or A in your formulas remains A=A and allows the use of expontentials to calculate PV or FV. The calc is programmed to use PMT under this premise, in this LOS these payments or cash flows are not equal, therefore they can't be put under the same definition of PMT or A
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