On Wednesday, December 18, 2013 1:27:39 PM UTC+5, Robert Miller wrote:
I would suggest that Abe to add a new row for the tadIRR and tadNPV functions to accept values for "Rate Rigged By" as shown below
Rates 4% 2% 5% 3% 2% 4% 3% 6%
Tax Rates 35% 36% 37% 38% 39% 40% 45% 50%
Cash Flows -100 75 150 -100 1000 50000 2000 90000
Frequencies 4 365 24 365 INF 260 INF 5200
Types 1 0 1 0 0 1 0 0
Compoundings 1/4 1/365 1/12 1/365 1 1/26 1 1/52
Periods 1/4 1/365 1/12 1/365 1 1/26 1 1/52
Concentrations 1 1/2 2 10 1 1/2 1 3/4
Hair Cuts 0% 20% 20% 20% 0% 20% 20% 20%
Rate Rigged by 0% 15% 15% 15% 0% 15% 15% 15%
Doing so will exaggerate the actual internal rate of return and bring down the net present value
I know it will be a hard decision to make for Honest Abe to indulge in such a shady practice, but then those who make a buck don't have any ethics :(
Thanks Bob but you know we don't Rob people in broad day light, it may be different if its late at night and someone is standing alone in a dark alley!
Bob what you stated about rigging rates reminds me of what Mike was once quoted as saying that is
"There are lies, damn lies and then there are interest rates" - Michael Marshall
The above quote is abstracted from a fairy tale called "Once upon a time in New York" starring Michael Marshall at a much younger age.
Your idea does ring bells and I had to fight my inner self when I decided to include options for rigging rates in Excel IRR function
http://tadxl.com/excel_irr_function.html and Excel NPV function
http://tadxl.com/excel_npv_function.html
However I will keep my fingers crossed that the Feds don't find out or else the domain
http://tadxl.com will be seized by Federal agents and I will be out of business once more :(
Now that I wanted to check the results of NPV using non-riggged and rigged rates, I noted that your assertion of expecting a lower net present value with rigged rates did not come through
See the same schedule of data for our NPV calculations
Rates 4% 2% 5% 3% 2% 4% 3% 6%
Tax Rates 35% 36% 37% 38% 39% 40% 45% 50%
Cash Flows -100 75 150 -100 1000 50000 2000 90000
Frequencies 4 365 24 365 INF 260 INF 5200
Types 1 0 1 0 0 1 0 0
Compoundings 1/4 1/365 1/12 1/365 1 1/26 1 1/52
Periods 1/4 1/365 1/12 1/365 1 1/26 1 1/52
Concentrations 1 1/2 2 10 1 1/2 1 3/4
Hair Cuts 0% 20% 20% 20% 0% 20% 20% 20%
Rate Rigged By 0% 15% 15% 15% 0% 15% 15% 15%
And using the Excel NPV function as follows passing it all 10 rows of data resulted in a pre-tax non-rigged NPV of $43,095.08 and a pre-tax rigged NPV of $43,466.15.
=tadNPV( B1:I1, B2:I2, B3:I3, B4:I4, B5:I5, B6:I6, B7:I7, B8:I8, B9:I9, B10:I10 )
Pre-tax non-rigged NPV = $43,095.08
Pre-tax rigged NPV = $43,466.15
After-tax non-rigged NPV = $73,949.02
After-tax rigged NPV = $74,192.46
Pre-tax NPV
Rigged NPV Non-rigged NPV
$43,466.15 $43,095.08
After-tax NPV
Rigged NPV Non-rigged NPV
$74,192.46 $73,949.02
I wouldn't doubt your authority on subject of finance, so I investigated the unexpected higher NPV for the rigged rate.
It dawned on me that since expense in payment number 4 in amount of -100 has a hair cut and a rigged rate yet the payment number 5 which is a perpetuity has no hair cut and rigged rate. This led to a lower negative present value of -100 for 365 period yet a higher positive present value of 1000 for infinite payments. Thus the resulting sum that is the net present value of all payments turned out higher in case of the rigged rate.
To confirm your claim, I changed the sign of 4th annuity payment to positive such as 100 and now that I used Excel NPV function
http://tadxl.com/excel_npv_function.html it showed a net present value for the rigged rate that is lower than the NPV for the non-rigged rate.
Rates 4% 2% 5% 3% 2% 4% 3% 6%
Tax Rates 35% 36% 37% 38% 39% 40% 45% 50%
Cash Flows -100 75 150 100 1000 50000 2000 90000
Frequencies 4 365 24 365 INF 260 INF 5200
Types 1 0 1 0 0 1 0 0
Compoundings 1/4 1/365 1/12 1/365 1 1/26 1 1/52
Periods 1/4 1/365 1/12 1/365 1 1/26 1 1/52
Concentrations 1 1/2 2 10 1 1/2 1 3/4
Hair Cuts 0% 20% 20% 20% 0% 20% 20% 20%
Rate Rigged By 0% 15% 15% 15% 0% 15% 15% 15%
=tadNPV( B1:I1, B2:I2, B3:I3, B4:I4, B5:I5, B6:I6, B7:I7, B8:I8, B9:I9, B10:I10 )
Pre-tax non-rigged NPV = $93,957.24
Pre-tax rigged NPV = $93,285.19
After-tax non-rigged NPV = $127,553.03
After-tax rigged NPV = $127,112.02
Pre-tax NPV
Rigged NPV < Non-rigged NPV
$93,285.19 < $93,957.24
After-tax NPV
Rigged NPV < Non-rigged NPV
$127,112.02 < $127,553.03
Bob, good and evil resides in all of us. It is our choice to select one of them. Remember that company called Google that calls itself "epitome of all good" but you know and I know that such a claim is nothing more than the cover for Vanity Fair magazine.