Friday, April 4, 2014

First reader feedback about reading the book and doing a deal in one day.

I heard my first piece of reader feedback.  A man who owns a business was approached by an employee who needed to borrow $2,000.  The employee offered to pay the money back by giving $1,200 at the end of the month and $1,200 at the end of the following month.  The repayment terms were proposed by the employee and were probably cheaper for him than going to a payday lender.

The reader said that he had been approached before by employees looking to borrow money and had always turned them down.  After reading the book, he looked at it differently.  He realized that since he pays them in arrears, he actually always owes them some money.  This would mitigate the risk in the deal significantly.  Let's examine how this deal worked for him and his rate of return:

PV  -2,000   He is giving the employee $2,000.  The money is moving away from him, therefore the figure is negative.

N             2   This is a two month deal.

FV           0   This is a fully amortizing deal, the money will be repaid in full after the 2 payments.

PMT 1,200   This is the amount that will be received each month.

I/Y           ?    We want to calculate the annualized yield on this deal.

I input the numbers into my BA II Plus Financial Calculator and get an annual return of 156.79%

I guess that reader's copy of the book has paid for itself already and he only had it for a day.

If you're not sure about how I figured this out or what PV, N, FV, PMT, or I/Y mean, you may want to buy the book.


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