Question

Assume you expect to receive $1,000 at the end of year 1, $1,200 at the end of year 2, and $2,400 at the end of year 3. Explain, in words, the process by which you can find the present value of these cash flows if the appropriate rate of discount is 6 percent.

Provide a discussion of the overriding objective of the financial manager, and comment on whether or not this goal is the appropriate goal for a corporate manager.

Answer 1

PV = FV/ (1+r)^n

End of Year 1's PV

FV = 1,000

n = 1

r = 6 %

PV = 1,000/(1+.06)^1

= $ 943.40

End of Year 2's PV

FV = 1,200

n = 2

r = 6 %

PV = 1,200/(1+.06)^2

= $ 1,068

End of Year 3's PV

FV = 2,400

n = 3

r = 6 %

PV = 2,400/(1+.06)^3

= $ 2,015.09

The Corporate manager is getting a good return out of the investment. The change in the money that he receives is different and he is able to receive a return of 20% and 100% in the last two years, which is more than the normal return. So the manager is able to achieve his goal and also he generating profits more than the current rate with a high risk.

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