Vote This Post Up Vote This Post Down: David P Burch

I suppose a strict interpretation would be as you said, but given the magnitude of the ultimate
answer, this seems to leave very little room for rounding (e.g. a student typing in part of a value
from an intermediate step rather than directly referring to the cell would almost surely get the
answer wrong, depending on how his spreadsheet formats the intermediate values). Having the
answer be in millions would allow for a bit more leeway, while still making it very difficult to
"luck" into the right answer. Or, failing that, at least allowing for more than 1 dollar error (from
what I've seen in other courses, Coursera does have this ability -- I think it has the ability to
accept answers within a lower and upper bound)
In any case, I'll abide by what the course staff says.
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David P Burch 5 days ago
This is ONLY for entering the answer, certainly not for working an actual problem through to its
conclusion via intermediate steps. If your calculator or spreadsheet uses eight, ten or a hundred
decimal places then by all means please use them. Just enter the answer as directed in each
question as the instructions can change from question to question
Venkatesh Natarajan 5 days ago
I understand that. My point is that even a slight round-off in these intermediate steps (which can
happen pretty easily if, say, you decide to type a value rather than actually insert the cell location
into the table), will cause the final answer to be wrong (even if you copy all of the digits in the
final answer the spreadsheet reports). You can argue that this is the student's own fault, but to me
it seems undesirable to make it that easy for a student to lose points even when he can do all the
steps right.
The other point I'd make is given that all the numbers given in the problem are in millions (e.g.
$7.2M, 50M), it's reasonable to ask whether that same formatting should apply to the answer.
I'm sorry, what is your point. Who is telling you to round off on intermediate steps. Not in this
course that I know of. You are arguing something that is imaginary.
Even one penny of error in 1867 will result in several dollars of error today, at 7% interest. Even
half a penny. My point is, even if a student probably shouldn't round off, I doubt the staff
intended the grading to be that sensitive to it.
And, every other number in this problem is expressed in millions of dollars (the "unit" is thus,
for those two mentions, "millions of dollars"), and the question prompt does not explicitly state
that the answer should be given in dollars (as opposed to millions of dollars). It's thus not
obvious which unit the question is asking for.
I do not see any ambiguity here. Nice round numbers. No penneys involved
1- $7,200,000.00 - given
2- $50,000,000.00 - given
3 - 3.00% - given
4 - 7.00% - given
Everything calculates from this set of numbers. The tricky part is make sure you have the correct
number of periods and when things happen. Only the answer needs to round off decimals.
A comment was deleted.
Robert Rassam (Student) 2 days ago

Hello David
Is it a perpetuity since tax revenues will be levied continually. In case yes I calculate C =
50000000 / (1.03)^144 It was 708613.87 then I calculated PV = c/(r-g) then this amount should
be discounted by dividing on 1.07 and subtracted from 7.2 M i got the amount of 9.3M
Muhammad Suleman Mahmood 1 day ago
Hello Robert, I used perpetuity formula and got a answer of ~10.5M. I also calculated but
restricting the cash flows till 2012 and got an answer of ~10.44M. Which one do you think
should be submitted.
Regards Suleman
Robert Rassam (Student) 1 day ago
Dear Muhammad, I think it is a perpetuity since tax revenues are always collected then you
should choose 10.5. but I am not very sure !
Muhammad Suleman Mahmood 1 day ago

I used perpetuity and that is the right answer. This was the only thing that confused me about this
one. Thanks
+ Add New Comment
Anthony Nguyen 5 days ago
This is the question I received for Assignment 3, Question 6:
"(10 points) The United States purchased Alaska in 1867 for $7.2M (where M stands for
million). Assume that federal tax revenue from the state of Alaska (net federal expenditures) will
be $50M in 2012 and that tax revenue started in 1868 and has steadily increased by 3% annually
since then. Assume that the cost of capital (or interest rate) is 7%. What is the NPV of the Alaska
purchase? (Hint: Try and imagine you are in 1867 looking forward.)(Enter just the number
without the $ sign or a comma; round off decimals.)"
I already submitted my first attempt, and my answer was marked incorrect. I want to identify
what I did wrong and, also, rework the problem so that I can submit my second attempt.
I actually calculated this two ways and obtained the exact same results: ~$10.4M. (I hope that,
since my answer is incorrect, and since I rounded, this doesn't go against the Honor Code!)
My first method was to built manually calculate the NPV on 146 (counting Year 0) Excel rows. I
listed the years, tax revenue (discounted by 3%), and the PV (relative to Year 0) for each cash
flow. Summing the PV column, I obtain the ~$10.4M result.
My second method was to actually use the "annuity with growth" formula discussed in Question
7. First, I discounted the tax revenue of $50M to 1868 (and I confirmed that this matched my
calculations from my first method). I plug in all of the appropriate values into the "annuity with
growth" formula to obtain a PV (relative to Year 0) of $17.6M. I subtract off the purchase price
of $7.2M and, once again, obtain $10.4M.
Anyone have insight into what I am doing wrong?
Comments

Remember, the question is asking for NPV from the point of view of 2012.
In other words, the answer should be in 2012 dollars as opposed to 1867 dollars.

Did you get the correct answer for this then?
The problem that I received specifically says "try and imagine you are in 1867 looking forward."
Wouldn't this imply that NPV is relative to Year 0?
I am afraid to submit (there are also other questions that to me have some ambiguity).
In any case, that was just a hint to help show how to approach the problem. I assume NPV means
NPV in the present day. I guess technically that means 2013, but presumably this question was
also asked in the previous run and then it was 2012, and I doubt that they have gone back and
adjusted the answer. (Also, 2012 is mentioned as when tax revenue was 50M)
Personally, I disagree. NPV is a present value calculation. Despite the word "present" in its
name, the result should be relative to Year 0. That said, obviously I got this question wrong.
Does the staff and/or TA have any insight?
Anonymous 5 days ago
We are being urged to look from the point of view of being in 1867. Please confirm if you got the
answer.
Well, looks like I'm not right either (at least, my answer was marked wrong, and I entered the
entire dollar amount (i.e. not in millions)). I'd try doing it in 1867 dollars, but I'd just get the
same answer as everyone else put in, so that seems futile.
DEVULAPALLI SAMPAT KUMAR 4 hours ago
Hi Anthony,
Your value is for 1867. Calculate value as of today, i.e., FV with respect to 1867. You will get it
right.
+ Add New Comment

I am getting the same ~10.4M as my answer. I have tried the problem several times but still get
the same answer.
+ Add New Comment
I also resulted to 10.4 but as you marked wrong. Regardless if the question still exists on 2nd
attempt, would appreciate any advice from those that succeeded in this, just to understand my
mistake.
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Gbor Liptk 5 days ago
I also got the 10.4M answer (relative to 1867), and it was marked wrong ... As per above, one
might have to assume that the answer has to be relative to 2012.
+ Add New Comment
I too was incorrect at the full amount of digits in the 10.4 range. The hint of drawing the 2 time
lines makes me think to remove one year from the tax revenue. In other words if taxes started
being collect in 1868 and everything other than the initial investment is at end of year the the
first time we would see income would be in the year number 2. SInce I do not have another crack
at this question I cannot prove my thinking. Obviously this would reduce the total NPV from the
figure we all seem to have calculated previously (result would have to be under 10M). This one
of the promary reasons I would like specific feedback once the hard deadline is past. I hate it
when I cannot reconcile my mistakes with firm understanding and not just my assuptions of what
I did wrong.
Comments
A comment was deleted.
+ Add New Comment

gracey wang 4 days ago
HI, I also found in Excel when doing NPV formula NPV=(0.07, A1:A145) (A1: A145 being the
revenue stream from 1868 to 2012), I got a significant different results as compared to calculate
PV for each of the individual revenue year. I know something was wrong there because
technically, the NPV should = sum of the PV for all the individual revenue year. can someone
point out what went wrong here. Thanks
Comments

If you're calculating just the tax revenue stream, then your result should be $17.4M (at least, I
think so, because I got the overall answer incorrect). If you use the "annuity with growth"
formula, you should get the same result. In my case, my manual NPV calculation gave the same
result as the "annuity with growth" formula.
So, either I got the concept of the problem incorrect... or the system's answer is incorrect. With a
handful of people in agreement that $10.4M is the answer (and with no one on the forum who
calculated the correct answer, or, even, an alternate answer), I'm suspecting that system may be
wrong...
+ Add New Comment
treemantan 4 days ago
OMG...I've also got the answer of 10.4..And of course, it was marked as incorrect though the
only
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Well, I have submitted both of my attempts. Then, I went back into the assignment two more
times. I've tried several values, and none of them worked.
Not even for the sake of the grade anymore, I'm curious who has obtained the correct result and
what was the methodology used.
+ Add New Comment
Georgi Kermekchiev (Student) 4 days ago
also got 104xx6xx, but it was marked wrong ... I do every assignment with two attempts, just for
practicing. So far all 100%. This question was on my second attempt of assignment 3, but got
90% ...
There is no doubt, the calculation should be done at year 0 (1867), I'm not sure only on whether
we shall also add tax revenue for 2013 ?!?
Comments
Carlos Alberto Reboucas (Student) 3 days ago

The "Hint" pushed me to think that we should figure out NPV @ 1867. In 2012, the number is
very large. Did anyone get it right?
+ Add New Comment
checked Wiki: "Alaska Day celebrates the formal transfer of Alaska from Russia to the United
States, which took place on October 18, 1867" ... so 2013 should not be also taken into account
Vote this post up -4 Vote this post down
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A post was deleted.
Yun Wang 4 days ago

I got the answer $10.4M and sumitted the answer in $ rather than in Million$ but I got no point. I
guess "round off decimal" means 10M or the timeline was totally wrong?
+ Add New Comment
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Yun Wang 4 days ago

Anybody try this answer $9,290,3XX ? I suppose the purchase happened at the beginning of year
1867 and the tax began from begining of 1868. So, the goverment got no tax in the year 1867
and the first tax is zero. I will draw a timeline to illustrate my ieda:my timeline
Comments
Yun Wang 4 days ago

checked Wiki: On March 30, 1867, the United States reached an agreement to purchase Alaska
from Russia for a price of $7.2 million. Because the tax revenue started in 1868, the US
goverment got no payment for nearly a whole year. I guess $9,290,3XX should be the right
answer also I'm not sure wheather the answer should be sumitted in $ or Million$
I got $9,7##,### on my second working of this problem but cannot submit as I am out of
submissions (only had this Q on my 2nd try where I used the $10,4##,### like many here). So I
am waiting for someone with correct answer to validate my new work or go back to drawing
board.
I have tried that value. Still incorrect. Also you can attempt the quiz even after your 2 attempts
are done. You just wont get graded for it. You will be able to verify your answer atleast.
Robert Rassam (Student) 2 days ago
Here is my steps in solving this problem i found an answer about 8.5 M outflow : -7500000 in
year 1867 Inflows year 2012: 50,000,000 = C1 year 2011: 50,000,000 * 0.97 = C2 year 2010: C2
*0.97 = C3
........ .............. = ... year 1868 = 6220000 it is simple when calculated on Excel
Then NPV (0.07, all values from C1) - initial investment equal approx. 8.5M Please tell me if I
am wrong
Dragana Milinkovic (Student) 1 day ago
Robert, I'm just starting so I don't know if you're right, but Alaska was purchased for 7.2M, and
you wrote 7.5M.
Robert Rassam (Student) 23 hours ago
Yes you are absolutely right it's 7.2 M not 7.5 M (typing mistake)
Sion Lane 9 hours ago
Good day Robert, your calculation above for C1 is incorrect...
C = C1 * (1+g)
therefore C1 = C / (1.03) which would give you a different answer altogether
working back with excel to 1868 you will get 7xx6xx.8xx instead
alternatively the quicker method is using PV@1868 = (r0.03, n144, 0, FV50000000) to arrive at the same
answer
HI, Julianas 1st step is correct, you must find the first incoming payment (C) =PV of 50M (nper=20121868=144) (rate=3%). Then you must find PV of all future cash flows usig perpetuity with growth formula
(PV=C/r-g) and substract cost of course!
Comments
Juliana Goryachkina 3 days ago
thank you, so the 2012 PV from 50M whould be 48,54M (not 50M as i put initially) and 145 period go back
PV whould be 0,69M...... or not/// just do not catch the way to put the formulae (PV=C/r-g) into the exel
cell.....

Euphemia, I wished you would have posted this hint earlier. It became absolutely clear when you mention
the formula. I believe most people on the forum have been able to come up with the tax revenue for 1868
to be $0.7M.
From there though, the tax revenue continues indefinitely, it does not stop in 2012. Therefore, the
"perpetuity with growth" formula is the correct one to use, not the "annuity with growth" formula.
Thanks! This hint made the problem very clear.
(Unfortunately, I have already submitted my 2nd attempt. I can live with 90% on this assignment, though!)
Euphemia OshchenkovaCOMMUNITY TA 3 days ago

Yee, it is perpetuity!

Julianna, it is just =C/r-g For example if the first payment is 100$, r=5% and growth rate = 2% it will be
=100/(0.05-0.02) and that's it!

All of this considering NPV @ 1968, not 2012. Right?
Juliana Goryachkina 3 days ago

Thanks a lot Euphemia! I've finally got it
yifang zhang (Student) 15 hours ago

hi Euphemia, why when calculating the first payment C1, we should use r=3% but not 7%? I am confused.
Thanks.
+ Add New Comment

I've tried non-scored attempt and I got the RIGHT answer ! 105xxxxx - Please consider perpetuity for tax
revenue !
Comments
Marcos Paulo Moreti 4 days ago

It makes sense. The question mentions that revenue will be 50M in 2012, but it does not say it will stop
generating revenue after that.
Yun Wang 3 days ago

How did you two get that answer 105xxxxx? I tried PV(.03,145,0,-50000000) and got $0.69M ,then I
applied the perpetuity concept ,PV/(0.07-0.03), and I subtracted the $7.2M, but I got the answer 9999xxx?
Anybody can help?

@Yun,
You are attempting to discount the $50M tax revenue in 2012 to the tax revenue in 1868. Your number of
periods should be 2012-1868 = 144. Try your calculations again with 144 instead of 145, and you'll have
the correct answer.

From today (end of 1967) until the end of 2012 there are 145 periods, but hint is that we need real amount
of payment in 1968 and it is 144 periods from 2012. That's why here we must use 144, so I made a
mistake at first, sorry!
Akshay Bhatia 3 days ago
Hey Euphemia... Even from the end of 1968 to the end of 2012, it is 145 periods. [ 3(1868, 69, 70) +
{10(71 to 80) *14} + 2( 2011, 12)] = 145. Am I computing wrong ???

End of 1968 means that 1968 is not included in discounting! So you should start with year 1969 actually. If
we take 4 periods - 2012,2011,2010,2009 we will get amount of payment at the end of year 2008. (+140
periods till end of 1968)
Akshay Bhatia 3 days ago

hmmm...I got this one. that year is not including for discounting. Thanks.
Yun Wang 3 days ago

@Anthony 3x ~
Yun Wang 3 days ago

hey @Anthony @Euphemia or anybody else, I know how to get the answer now. But one things confuses
me still. To my understanding, the tax of year 2012 is $50M, so the goverment got the money at the end of
year 2012. So , using PV formula , I can get the PV of year 1868 is $0.71M and the final PV of perpetuity
$177xxxxx. But I thought $177XXXXX is not the PV at the end of year 1867 but year 1868. As The United
States purchased Alaska in 1867, shouldn't we have one more discount? Can someone draw a timeline
for me to explain the relationship between year ,tax,purchase and required PV? 3x very much

Even though you are doing two PV calculations, one for the tax revenue and one for the perpetuity, the PV
calculations have different initial time periods.
More specifically, if you know the tax revenue is $50M in 2012, the PV calculation views 1868 as Year 0.
For the perpetuity, Year 1 is the first perpetuity payment (tax revenue). If you want PV for perpetuity, Year
0 is the year before the first perpetuity. Since 1868 is the first year of tax revenue, the PV calculation is for
1867.

I believe most of us had the timeline correct. The issue is of when to stop using NPV for our calculations
and start using the perpetuity formula for calculations of many, many years. I would wager a guess that if
this question had asked for say the end year to have been 1966 thereby making it less than 100 periods
our NPV calculations would have worked. It becomes a matter of differing between the two methods by an
increasing difference of a few dollars every year. You can use perpetuity to 1000s of years but not so NPV

Well, the different between an annuity and a perpetuity (in the finance sense) is that an annuity has a
finite number of payments and a perpetuity is a (theoretically) infinite number of payments.
Even if you knew that there were thousands of year of payments, but those payments were finite, the
annuity formula is correct.
In reality though, the annuity and perpetuity formulas will (practically) converge...
Chloe K. 2 days ago
Anthony, you are right. The 10.4M which most of us initially got is (somewhat) close to the correct answer,
though I suppose it would take much much longer than 100+ years for annuity and perpetuity calculation
answers to converge.
And I redid the problem and got the correct answer, finally! No more credit of course. But learning how to
do it, and being able to discuss it here with fellow students is worth much more than the extra points.
+ Add New Comment

Rohan Shah 4 days ago
Exactly. I got it. Think "Perpetuity" not "Annuity".
+ Add New Comment
schmelzer etienne antonin 3 days ago
Euphemia, Hello, thanks for always very valuable help, could you confirm that the pertuity approach is
correct... Thanks.
Comments
Euphemia gave the formula as a hint. The perpetuity with growth approach is the correct approach.
+ Add New Comment

Just some additional intuition for those who missed the question.
The answer I thought was correct was $10.4M, assuming the tax revenue stream ends in 2012 (that is, a
very, very long annuity). However, the right answer is $10.5M since the tax revenue stream is indefinite
and, therefore, is a perpetuity.
If you calculate the PV (relative to 1867) of the $50M of tax revenue in 2012, it is only $2K. 2013 would be
less, 2014 would be less than 2013, etc. The summation of the years following 2012 will lead you from
$10.4M to $10.5M as the answer.
Of course, the correct mathematical approach is to use the first tax revenue stream, C, in the perpetuity
with growth formula, PV=C/(r-g).
Comments
Abracadabra!

We are falling like dominoes, beating the evil NPV into submission.
Congrats
+ Add New Comment

Ta da !! Finally on attempt 22/2 (many of course the other question 6 which I always had correct) I got it.
All my NPVs had been correct up to this one, but I guess NPV runs out of usefullness when periods gets
beyond a certain point. I had thought it was around 200 periods but apparentlly not. What's a ~ $100K
amoungst friends?
Thanks to the many contributors in this effort - I just wanted to know how to calculate - not so concerned
with score.
Comments
LOL. Congrats!
WEI LI 1 day ago

David, did you bring back the PV in 1868 to 1867 PV and then subtract the purchase cost? if do so,
seems the answer will not be the 10.5M instead of 9.36M range. I saw several post said the correct
answer is 105M and also several people said we must bring it back to 1867 to calculate the NPV.
+ Add New Comment

Qiaobin Zhang 3 days ago
Timeline has tricked me again! Apparently it should be 144 instead of 145. The 'Hint: Try and imagine you
are in 1867 looking forward' actually makes me think 1867 is year 0, again, I have failed on drawing the
correct timeline.
Comments
Actually it is correct - end of year 1867 is year 0 (145 periods), but perpetuaty formula needs C for year 1 (
1 year from today) and it is 1968 or 144 periods!
Illarion Makarikhin 2 days ago

Dear Euphemia I've calculated answer 10. 52 but it was counted as incorrect :-( So PV discounted to
1868 is 0,71 and PVofGP is 17.x2 Where i went wrong?

@Illarion, the answer is approximately $10.52M... if you got the answer wrong, then unfortunately, your
last few digits were off somehow.
In your comment, you posted "PVofGP is 17.x2." Can you clarify what you mean?
Once you have $0.71M as the initial tax revenue (which is considered "C"), the perpetuity with growth
formula is PV = C/(r-g). From there, you still have to calculate the NPV using the perpetuity PV and the
purchase price for Alaska.
Illarion Makarikhin 2 days ago

Anthony PVofGP is 17,72

Oh, yes, I understand now.
Your first few digits for your calculations are correct. Your error is in the last few digits. Perhaps, you have
a rounding issue?
Illarion Makarikhin 1 day ago

Sorry Anthony, my connection was lost till today. So about a rounding issue... Well, I used excel for a
calculation. And to calculate PVofGA I'd calculated PV of 50M at year 1868 (for 144 year) and got 0.71,
then used this number and 0.71/(0.07-0.03) , so I got 17.72 and so on...So as to the final answer it is
10.515 so we can round it in either way 10.51 or 10.52
Anthony Nguyen 1 day ago

You should input your answer to the nearest whole dollar... Since it's 10 million dollars, you need to input
8 digits, rounding only the last digit.
Illarion Makarikhin 1 day ago

Wow, Thanks a lot!!!! I got 100/100 in the second attempt. :-)

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I suppose a strict interpretation would be as you said, but given the magnitude of the ultimate

Robert Rassam (Student) 2 days ago

Muhammad Suleman Mahmood 1 day ago

Venkatesh Natarajan 5 days ago

Anthony Nguyen 5 days ago

+ Add New Comment

+ Add New Comment

Anthony Nguyen 4 days ago

Carlos Alberto Reboucas (Student) 3 days ago

Yun Wang 4 days ago

Yun Wang 4 days ago

Yun Wang 4 days ago

Anthony Nguyen 3 days ago

Euphemia OshchenkovaCOMMUNITY TA 3 days ago

Euphemia OshchenkovaCOMMUNITY TA 3 days ago

Carlos Alberto Reboucas (Student) 3 days ago

Juliana Goryachkina 3 days ago

yifang zhang (Student) 15 hours ago

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Marcos Paulo Moreti 4 days ago

Yun Wang 3 days ago

Anthony Nguyen 3 days ago

Euphemia OshchenkovaCOMMUNITY TA 3 days ago

Akshay Bhatia 3 days ago

Euphemia OshchenkovaCOMMUNITY TA 3 days ago

Akshay Bhatia 3 days ago

Yun Wang 3 days ago

Yun Wang 3 days ago

Anthony Nguyen 3 days ago

David P Burch 3 days ago

Anthony Nguyen 3 days ago

Chloe K. 2 days ago

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David P Burch 3 days ago

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WEI LI 1 day ago

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Illarion Makarikhin 2 days ago

Anthony Nguyen 2 days ago

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Anthony Nguyen 2 days ago

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