Interest Rate Parity
One year rates are:
US: 2%
EUR: 1.5%
GBP: 3%
The EURUSD rate is 1.10.
The GBPUSD rate is 1.18.
1. What should the 1 year EURUSD forward rate be?
2. What should the 1 year GBPUSD forward rate be?
3. What should the 1 year EURGBP forward rate be?
4. If the 1 year EURUSD forward rate is 1.15, describe the steps needed to earn a riskless profit.
5. If the 1 year GBPUSD forward rate is 1.15, describe the steps needed to earn a riskless profit.
In: Finance
1. Point-of-Sale System: We have two companies that can implement a point-of-sale system. Both with cost $200,000 to implement. Company A says we will receive the following returns on our investment: Year 1: $85,000; Year 2: $25,000; Year 3: $30,000; Years 4–10: $10,000. Company B says we will receive the following returns on our investment: Year 1: $30,000; Year 2: $25,000; Year 3: $85,000; Years 4–10: $10,000. Using the payback method, which company should we use and Why?
In: Finance
solo corp. is evaluating a project with the following cash flows: Year 0 cash flow 29,900 year 1 cash flow 12,100 year 2 cash flow 14,800 year 3 cash flow 16,700 year four cash flow 13,800 year 5 cash flow 10,300. the company uses a discount rate of 11 percent and a reinvestment rate of 8 percent on all of its projects. a calculate the MIRR of the roject using the discouonting approach b. calculate the MIRR of the project using the reinvestment approach. c. calculate the MIRR of the project using the combination approach.
In: Finance
Projecting revenues, cost of goods sold, and inventory
use the following data for Walgreens in years 11 and 12 to project revenues, cost of goods sold, and inventory for year +1. Assume that Walgreen's year +1 revenue growth rate, gross profit margin and inventory turnover will be identical to year 12. Project the average inventory balance in year+1 and use it to compute the implied ending inventory balance.
Walgreens (data in millions) Year 11 Year 12
Sales revenues $53,762 $59,034
Cost of goods sold $38,518 $42,391
Ending inventory $ 6,791 $ 7,249
In: Finance
A wine lover has decided to start a winery. The initial investment will be $5 million on Day 1. The winery will require an additional $1 million dollars investment at very beginning Year 1. The vines will mature over five years. Beginning at the end of year 6, the winery is expected to produce net cash inflows of $2 million, 4 mil in year 7, 6 mil in year 8, 8 mil in year 9 and 10 mil in year 10. What is the NPV, IRR, and Payback (non- discounted and discounted) assuming a discount rate of 15 percent?
In: Finance
The City of San Antonio is considering various options for providing water in its 50-year plan, including desalting. One brackish aquifer is expected to yield desalted water that will generate revenue of $4.1 million per year for the first 5 years, after which less production will decrease revenue by 10% per year each year. If the aquifer will be totally depleted in 23 years, what is the present worth of the desalting option revenue at an interest rate of 5% per year?
The present worth of the desalting option revenue at an interest rate of 5% per year is determined to be $
In: Economics
Bill has been adding funds to his investment account each year for the past 3 years. He started with an initial investment of $1,000. After earning a 10% return the first year, he added $3,000 to his portfolio. In this year his investments lost 5%. Undeterred, Bill added $2,000 the next year and earned a 2% return. Last year, discouraged by the recent results, he only added $500 to his portfolio, but in this final year his investments earned 8%. What was Bill's dollar-weighted average return for his investments?
In: Finance
A project requires an initial investment of $20,000,000. The life of the project is 3 years. The $20,000,000 investment will be depreciated using the three-year modified accelerated cost recovery system (MACRS) class (see the table below). The firm estimates that, in the first year, the revenues and total production costs will be $60,000,000 and $45,000,000, respectively, in nominal terms. After that the sales and production costs are expected to increase at the inflation rate of 4 percent per year over the life of the project. In addition, it has a before-tax salvage value (or resale value) at the end of the project of $9,000,000. The mine will require a net working capital (NWC) investment of 7 percent of sales. The NWC will be built up in the year prior to the sales (e.g., the net working capital requirement for year 0 is 7% of sales in year 1 and the additional net working capital cash flow for year 1 is 7% of the difference in sales between year 2 and year 1). All net working capital cash flows are fully recoverable when the project ends. The tax rate is 25 percent. The project only depreciates the $20,000,000 initial cost. The salvage value is excluded from depreciation. a) Find the operating cash flow (OCF) of this project for each year. b) If the real discount rate (or required rate of return) of the project is 14 percent, what is its net present value (NPV)? Year MACRS Depreciation Allowances for 3-year Recovery Period Class 1 33.33% 2 44.44% 3 14.82% 4 7.41%
In: Finance
Your friend and colleague has been working for about a year since graduating from university. He has come to you for advice on his saving and spending habits. You have accumulated the following information on his savings and spending that has occurred over the past year:
|
Saving/Spending |
Amount $ |
|
Salary received over the last year, net of income tax |
45,000 |
|
Rent and utilities paid |
16,600 |
|
Car expenses paid |
4,800 |
|
Credit card debt at the start of the year |
1,000 |
|
Food, entertaining, recreation paid |
6,000 |
|
Credit card debt at the end of the year |
2,500 |
|
Line of credit at the start of the year |
2,500 |
|
Line of credit at the end of the year |
1,200 |
|
Purchase of car |
20,000 |
|
Car loan at the end of the year |
15,000 |
|
Cash account balance at the beginning of the year |
500 |
|
Cash received from disposal of motorcycle |
1,000 |
|
Cash received from disposal of computer |
100 |
|
Cash account balance at the end of the year |
1,000 |
|
Purchase of Investments |
5,500 |
|
Student loan at the beginning of the year |
15,000 |
|
Student loan at the end of the year |
10,000 |
|
Purchase of new computer |
1,500 |
|
Interest expense paid |
1,400 |
Instructions
Prepare a statement of cash flow for your friend from information provided above using the direct method.
Can you provide some advice to your friend on how he could improve his cash flow strategies, such as managing debt levels and terms of payment?
Please ensure that your response is written in full sentences and that you provide an explanation and/or a calculation to support your answers.
In: Accounting
X Company is considering the replacement of an existing machine. The new machine costs $1.8 million and requires installation costs of $250,000. The existing machine can be sold currently for $125,000 before taxes. The existing machine is 3 years old, cost $1 million when purchased, and has a $290,000 book value and a remaining useful life of 5 years. It was being depreciated under MACRS using a 5-year recovery period. If it is held for 5 more years, the machine’s market value at the end of year 5 will be zero. Over its 5-year life, the new machine should reduce operating costs by $650,000 per year, and will be depreciated under MACRS using a 5-year recovery period. The new machine can be sold for $150,000 net of removal and cleanup costs at the end of 5 years. A $30,000 increase in net working capital will be required to support operations if the new machine is acquired. The firm has adequate operations against which to deduct any losses experienced on the sale of the existing machine. The firm has a 15% cost of capital, is subject to a 40% tax rate and requires a 42-month payback period for major capital projects.
5-Year MACRS
Year 1 20%
Year 2 32%
Year 3 19%
Year 4 12%
Year 5 12%
Year 6 5%
1. Should they accept or reject the proposal to replace the machine?
2. What is the NPV?
3. What is the IRR?
4. What is the payback period?
In: Finance