Microsoft Press book - Data Analysis and Business Modeling

[David]

I am using Microsoft Press' book Microsoft Excel Data Analysis and Business
Modeling. I have a question regarding Chapter 8, question 3. The answer
uses .625 years for yr 0, 1.625 years for yr 1, etc. when using the IRR
function. Where does the .625 come from?

Thanks,
David

 

[Vasant Nanavati]

I don't have the book, but perhaps it's because the start date is May 15?
..625 years would be 7.5 months.

 

[David]

Its something like that. The problem is as follows:

"Beginning one month from now, a customer pays $25 per month in revenues for
the next 5 years. Assuming all revenue for a year is received at the middle
of a year, estimate the NPV of these revenues. Use r = .15."

(I just realized I originally said the problem had to do with IRR. It
actually is an NPV problem. Sorry.)

I understand the analysis once I get past the .625 years. But is there
anything in the problem to suggest why it should use 7.5 months? The
following is the answer found on the CD that comes with the book.


r 0.15

Time in Years
0.625 $300.00
1.625 $300.00
2.625 $300.00
3.625 $300.00
4.625 $300.00

so $1 in .625 years is worth 1/1.15^.625
$1 today grows to 1.15^.625 in .625 years
NPV in year .625 dollars $1,156.49

NPV in today's dollars $1,059.76

Thanks,
David