a tvm question??

C

cagal

New member
Joined
Jun 18, 2006
Messages
0
Reaction score
0
hey i hav a tvm question.plz help me out with t answer..

YOU ARE CONSIDERING PURCHASE OF A NICE HOME.IT IS EVRY WAY PERFECT FOR U AND IN EXCELLENT CONDITION,EXCEPT FOR THE ROOF.ROOF HAS ONLY 5 YRS OF LIFE LEFT/REMAINING.A NEW ROOF WOULD LAST FOR 20 YRS AND COST 20000$.THE HOUS IS EXPECTED TO LAST FOREVER.
ASSUMING THAT THE COST WILL REMAIN CONSTANT AND INT RATE IS 5 %,WHAT VALUE WOULD U ASSIGN TO THE EXISTING ROOF??


THE ANS IS GIVEN AS 6948$.
plz help me with the solution..
thnx.bye.
 
PV of $x for 20 years at 5% is $20,000. $x, representing annualized cost for a new roof, is $1605.

PV of $1605 for 5 more years (expected remaining life of existing roof) is $6948.
 
hey could u explain the calculation in detail plz.....
i m finding this a little difficult..
 
Sorry, my kid was screaming earlier, didn't have much time to give details.

The idea is that $20,000 lump sum for a new roof up front can be "equalized" to an annual cost of $1605, paid once per year for the life of the roof (20 years). (It's sort of like the NPV questions with different time periods, where you calculate an "equivalent annual annuity".)

Anyways, this is a standard annuity calculation you can do with your calculator. If you haven't figured out how to use your calculator for these yet, do it now. There's stuff online for both HP and TI calculators.

Once you figure out that $1605 is the annual cost, then with five years to go, the value of the roof is equal to a 5-year annual annuity, with PMT=1605. (Again, a simple calc with either calculator.)

Personally I think it's a bad question, it's got way too many ways to interpret. (Where'd it come from?) For example, if you didn't say it was a TVM question, I might have started thinking about fixed assets and depreciation methods etc. Fact is, if you said it was a company I was buying and the roof was a piece of machinery instead, none of the common depreciation/asset valuation methods would lead to the answer 6948.
 
Investment Science - David G. Luenberger ( Chapter 2 - Sum 9 )
 
You must log in or register to reply here.
Back
Top