Textbook Question 3

Use what you have learned about the time value of money to analyze each of the following decisions:

Decision #1:   Which set of Cash Flows is worth more now?

Assume that your grandmother wants to give you generous gift. She wants you to choose which one of the following sets of cash flows you would like to receive:

Option A: Receive a one-time gift of $ 10,000 today.   

Option B: Receive a $1500 gift each year for the next 10 years. The first $1500 would be

     received 1 year from today.                 

Option C: Receive a one-time gift of $18,000 10 years from today.

Compute the Present Value of each of these options if you expect the interest rate to be 3% annually for the next 10 years.    Which of these options does financial theory suggest you should choose?

       Option A would be worth $__________ today.

      Option B would be worth $__________ today.

       Option C would be worth $__________ today.

       Financial theory supports choosing Option _______

Compute the Present Value of each of these options if you expect the interest rate to be 6% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

       Option A would be worth $__________ today.

       Option B would be worth $__________ today.

       Option C would be worth $__________ today.

      Financial theory supports choosing Option _______

Compute the Present Value of each of these options if you expect to be able to earn 9% annually for the next 10 years. Which of these options does financial theory suggest you should choose?

       Option A would be worth $__________ today.

       Option B would be worth $__________ today.

       Option C would be worth $__________ today.

       Financial theory supports choosing Option _______

Decision #2: Planning for Retirement

Erich and Mallory are 22, newly married, and ready to embark on the journey of life.   They both plan to retire 45 years from today. Because their budget seems tight right now, they had been thinking that they would wait at least 10 years and then start investing $3000 per year to prepare for retirement. Mallory just told Erich, though, that she had heard that they would actually have more money the day they retire if they put $3000 per year away for the next 10 years - and then simply let that money sit for the next 35 years without any additional payments – then they would have MORE when they retired than if they waited 10 years to start investing for retirement and then made yearly payments for 35 years (as they originally planned to do).   Please help Erich and Mallory make an informed decision:   

Assume that all payments are made at the END a year (or month), and that the rate of return on all yearly investments will be 7.2% annually.  

(Please do NOT ROUND when entering “Rates” for any of the questions below)

1. How much money will Erich and Mallory have in 45 years if they do nothing for the next 10 years, then put $3000 per year away for the remaining 35 years?

2. How much money will Erich and Mallory have in 10 years if they put $3000 per year away for the next 10 years?

b2) How much will the amount you just computed grow to if it remains invested for the remaining

35 years, but without any additional yearly deposits being made?

3. How much money will Erich and Mallory have in 45 years if they put $3000 per year away for each of the next 45 years?

How much money will Erich and Mallory have in 45 years if they put away $250

4. per MONTH at the end of each month for the next 45 years? (Remember to adjust 7.2% annual rate to a Rate per month!)

5. If Erich and Mallory wait 25 years (after the kids are raised!) before they put anything away for retirement, how much will they have to put away at the end of each year for 20 years in order to have $1,000,000 saved up on the first day of their retirement 45 years from today?

McGilla Golf is evaluating a new line of golf clubs. The clubs will sell for $920 per set and have a variable cost of $410 per set. The company has spent $137,500 for a marketing study that determined the company will sell 46,500 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,700 sets of its high-priced clubs. The high-priced clubs sell at $1,420 and have variable costs of $550. The company also will increase sales of its cheap clubs by 11,300 sets. The cheap clubs sell for $410 and have variable costs of $140 per set. The fixed costs each year will be $9,250,000. The company has also spent $975,000 on research and development for the new clubs. The plant and equipment required will cost $28,350,000 and will be depreciated on a straight-line basis to a zero salvage value. The new clubs also will require an increase in net working capital of $2,290,000 that will be returned at the end of the project. The tax rate is 24 percent and the cost of capital is 15 percent. Calculate the payback period. (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) Calculate the NPV. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Calculate the IRR. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Three years from now (now =Year 0) the equipment that Dark Star Technologies uses to coat and protect the surfaces on its products will have to be replaced. Dark Star plans to operate the new equipment for 7 years (Years 4 to 10). The company is considering two procurement options.

Option 1: MAKE the manufacturing equipment in-house. The yearly acquisition costs associated with developing the equipment in-house are as follows: Year 1 = $200,000, Year 2 = $700,000, Year 3 = $1,000,000. The Annual Operation & Maintenance Cost of the in-house developed equipment will be $100,000 (Years 4 to 10). Assume the equipment has zero salvage value.

Option 2: BUY manufacturing equipment available from ACME Specialties. The acquisition cost associated with purchasing the equipment is $1,000,000 (Year 3). The Annual Operation and Maintenance Cost of the manufacturing equipment purchased from Acme Specialties will be $300,000 (Years 4 to 10). Assume the equipment has zero salvage value. For an interest rate = 10%

a) Calculate the equivalent cost at future Year 3 of Option 1 and Option 2. Year 3 is when the system goes into operation, i.e., the end of the production phase for Option 1 (MAKE) or when the purchased equipment is ready for use OPTION 2 (BUY).

b) Which option should Dark Star Technologies choose based on equivalent costs?

Please show what equations are used

I need to create a business plan for Johnson & Johnson, it does have to fit to their specific financial situations. Maybe just some examples? please help?

A. Financial Projections

How will you fund the business?

What is your desired debt and equity position?

Who will provide capital debt funds?

What role will leasing play in your financial strategy?

Will you use outside investors for equity capital?

How will you manage the financial risks your business faces?

What operating procedures, such as developing cash flow budgets or spending limits, will you have to ensure adequate money for debt repayment?

What are the important assumptions that underlie your projections? These assumptions may be associated with both external or internal factors.

What financial aspects of your business (equity, asset growth, ROA, ROE, etc.) will you monitor?

What procedures will be used for monitoring overall business performance?

What level of performance will your business shoot for? These should be targets for next year and in five years. They should be financial performance standards used to monitor the overall business.

What yield and output levels could you attain? What efficiency levels will you reach?

Using the FINRA Bond Center search engine, determine if any U.S. government agencies issue preferred stock. If you find a preferred stock issue from a U.S. government agency, create a screen capture of the first 10 lines or so of bond detail info retrieved by the search engine, and display it below. Be sure that it includes the “maturity date” and “bond type” fields. (Hint: remember that preferred stock is a hybrid bond-like equity security and is “perpetual”.)

You estimate that a passive portfolio, that is, one invested in a risky portfolio that mimics the S&P 500 stock index, yields an expected rate of return of 16% with a standard deviation of 25%. You manage an active portfolio with expected return 21% and standard deviation 32%. The risk-free rate is 8%. Your client's degree of risk aversion is A = 1.8.

a. If he chose to invest in the passive portfolio, what proportion, y, would he select? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. What is the fee (percentage of the investment in your fund, deducted at the end of the year) that you can charge to make the client indifferent between your fund and the passive strategy affected by his capital allocation decision (i.e., his choice of y)? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

For a typical U.S. (exchange-listed) corporation, approximately what is the cost of equity capital? Explain your reasoning. What firm characteristics (other than leverage) are associated with higher than average costs of equity capital?

What is Fractional Banking? How does it impact the money supply? What would happen to the money supply size if several large banks all failed at the same time? Should the U.S. government bail out failing banks? What is moral hazard? What is capital injection?

what is financial inclusion? write up 10 pages on the weaknesses of the financial system in Zambia.
recommend what should be included in the financial inclusion in Zambia

Net present value: Emporia Mills is evaluating two heating systems. Projects are independent. Costs and projected energy savings are given in the following table.

The company uses 10.73 percent to discount such project cash flows. The NPV of System 100 is $__________.

the NPV of System 200 is $__________, and Emporia should choose System 200 or neither system or System 100 or both systems.

Wendy's boss wants to use straight-line depreciation for the new expansion project because he said it will give higher net income in earlier years and give him a larger bonus. The project will last 4 years and requires $1,770,000 of equipment. The company could use either straight-line or the 3-year MACRS accelerated method. Under straight-line depreciation, the cost of the equipment would be depreciated evenly over its 4-year life. (Ignore the half-year convention for the straight-line method.) The applicable MACRS depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. The project cost of capital is 8%, and its tax rate is 25%.

1. What would the depreciation expense be each year under each method? Enter your answers as positive values. Do not round intermediate calculations. Round your answers to the nearest dollar.

Which depreciation method would produce the higher NPV, and how much higher would it be? Do not round intermediate calculations. Round your answer to the nearest cent.

The NPV under -Select-Scenario 1Scenario 2 will be higher by $   .