Hermann corp is considering an investment of $375 mil with expected after-tax cash inflows of $115 mil per year for 7 years and an after-tax salvage value of $50 mil in year 7. The required rate of return is 10 percent. Waht is the PI?
So profitability index is present value of cash inflows over investment. I can do this by hand, no problem, but it is time-consuming if its possible to use the calculator. So I enter N=7, I/Y=10, PMT=115, FV=50 and I CPT PV and get -700. However the answer SHOULD be -585 (at least in the sense that the sum of 115 for 7 years discounted back plus 50 discounted back 7 years is -585). What am I doing wrong here?
Yup, my P/Y was set to 2. What is P/Y and C/Y? I leant this calculator to a colleague who must have changed it because I’ve never used that function before. Too bad there is no key to return all values to some default value (clr tvm didnt change P/Y)
Obviously. I suppose my question was what the difference was from, say, assuming 10 periods (N=10) for 5 years with payments made twice per year. I suppose the P/Y and C/Y variables are necessary only when the number of compounding periods doesn’t match the number of payments? So then I assume that P/Y and C/Y assume evenly spaced payments or compounding periods? For example, if you receive payments from an annuity in Jan and Feb but compounding is monthly then you would need to do that by hand? I’m just trying to understand the caveats.
For your 5 year example with 2 payments/year, P/Y=2. If your interest rate is x% nominal semi-annual, then C/Y=2 as well. However, if the interest rate is stated with another compounding frequency (e.g. quarterly,monthly, weekly), all you have to do is set C/Y to reflect it (4, 12, 52, respectively). P/Y and C/Y don’t have to be equal: the default Canadian mortgage is monthly pay with semi-annual compounding, leading to P/Y=12 and C/Y=2.
The wording of the problem will give you a good idea how to set P/Y and C/Y. For the Hermann example, they tell you the payment is 115 million per year, so P/Y=1 and C/Y=1; for a coupon-paying corporate bond, you would set P/Y=2 and the calculator would automatically set C/Y=2.
And it’s always a good idea to check P/Y and C/Y first before starting a TVM problem…
Cool. So if I set P/Y to 2 and C/Y to 2 for a corporate bond with a 5 year maturity then N=5, right? What I’ve been doing is setting N to the number of compounding/payment periods (if they were equal, otherwise I was calculating by hand, which is more time-consuming so thanks for the tip).
You have a choice of 2 methods for entering N: for your example, you could plug in 10 straight away for N, or you could enter 5, 2nd, N, which would multiply the 5 years by P/Y for you, then N again to register the 10.