Net Present Value Calculation
Course: Fundamentals of Financial Planning
Lesson 5: Using the Financial Calculator
Student Question:
I have a question about NPV. In the section “NPV and IRR Review Questions”, the first question references someone trying to decide if they should prepay tuition. Here is the question:
- Sylvester’s daughter will start four years of college in a year. The college has a plan under which Sylvester can prepay four years of tuition by paying $60,000 now. He estimates the tuition will be $13,000 in year 1, $15,500 in year 2, $17,000 in year 3, and $19,000 in year 4. Sylvester earns 9.5% after-tax on his investments. Should he prepay the tuition? (Hint – college starts in one year; therefore, you can think of the tuition payments as being made at the end of the first, second, etc., years).
Yes
No
Instructor Response:
When I look at the answer keystrokes, it appears as if I’m supposed to include the $60,000 prepayment as the first payment. Then it has me enter the four projected payments. I don’t understand why I enter 60,000 AND the projected payments. Wouldn’t it be one or the other? It’s not like the other examples where there’s an upfront charge (I.e. buying an ice cream machine) and then getting payments from it. The $60,000 prepayment would mean the other four projected payments would not happen, correct? So why am I entering all five of those numbers as CFj?
Hopefully that makes sense.
