PV, FV, PMT

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zxfmontreal

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question 7 in 2015 exam.
Betty plans to make an immediate one-time gift to her son Ryan. For Ryan, the annual cash outflow would be -360,000 for the next 4 years. The gift will be invested in a portfolio with 6% return and Ryan will beed a portfolio valued at 5,000,000 in 4 years to maintain his life stype. Calculate the amount of the one-time gift that must be transferred from Betty to Ryan to allow him to achieve his goals.
My calculations: FV=5,000,000, N=4, I/Y=6, PMT=-360,000
CFA solution: FV= - 5,000,000 with all the rest the same, PV = 5,207,964
My question is why? Shouldn’t the FV represent the value of the portfolio in 4 years? If i would invest a certain amount today (negative value) to have a certain future value in 4 years, shouldn’t the sign of this future value be positive?
 
PMT is an outflow, so is the final value of the FV in 4 years time. So both have the same sign.
and your PV is an inflow.
So the Inflow and outflow should have opposite signs.
 
Whenever I teach CFA candidates about the cash flow buttons, I start by telling them that they should choose a point of view – the account or the account owner – and always use that point of view.
CFA Institute has chosen the point of view of the account:
  • The future value of $5,000,000 is an outflow, so it’s negative
  • The payments of $360,000 are outflows, so they’re negative
  • The present value is an inflow, so it’s positive
If, instead, you choose the viewpoint of Ryan (and Betty):
  • The future value of $5,000,000 is an inflow, so it’s positive
  • The payments of $360,000 are inflows, so they’re positive
  • The present value is an outflow, so it’s negative
 
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