Question

Which of the equations below is correct to compute the present value of the cash flows at 8% interest?

a. p=1000(p/a,i,8)−150(p/g,i,8)+ 150(p/g, i, 4)(p/f, i, 4)
b. p=400(p/a,i,8)+600(p/a,i,5)− 150(p/g, i, 4)
c. p=150(p/g,i,4)+850(p/a,i,4)+ 400(p/a, i, 4)(p/f, i, 4)?

Answer 1

All the initial values [ 1000, -150, +150, etc ] are amounts, that can be positive or negative, so all are valid.
The functions (p/a, i, 8) have the form (function name, interest rate (=0.08), and number of periods), so all are valid.
Function names p/a, p/g,p/f are all valid.
What are not valid would be where two functions that are chained together that do not make sense.
For example, p/g and p/f both calculate the present values, and therefore cannot be chained together. Similarly for p/a and p/f. This makes options a and c invalid, respectively.