Financial management full assignment
951380
mba622_a01_template.xls5-31
| Problem 5.31 | Future Value | ||||||
| You have €12 000 in cash. You can deposit it today in a mutual fund earning 8.2 per cent semi-annually, or you can wait, enjoy some of it, and invest €11 000 in your brother’s business in two years. Your brother is promising you a return of at least 10 per cent on your investment. Whichever alternative you choose, you will need to cash in at the end of 10 years. Assume your brother is trustworthy and both investments carry the same risk. | |||||||
| Which one will you choose? | |||||||
| Hint: Determine the future value of each option at the indicated interest rate and time period. Create a solution using time value of money equations and then use the FV financial function to solve: FV(rate,nper,pmt,pv,type). Make sure that all cells are properly formatted. The frequency of compounding periods per year is denoted by "m." | |||||||
| Option A: | Mutual Fund | Option B: | Brother's Business | ||||
| Enter: | N = | 10 | Enter: | N = | 10 | ||
| Enter: | I = | 8.20% | Enter: | I = | 10.00% | ||
| Enter: | PV = | $12,000.00 | Enter: | PV = | $12,000.00 | ||
| Enter: | m = | 2 | Enter: | m = | 1 | ||
| Results (equation): | FV10 = | $26,803.77 | Result: | FV10 = | |||
| Results (FV function): | FV10 = | $26,803.77 | Result: | FV10 = | |||
| Given the analysis above, the best alternative is to invest in the | |||||||
| The better alternative yields an additional | |||||||
| Equation: | FV = |
5-32
| Problem 5.32 | Interest Rate | ||||||||
| You are graduating in two years, and you start thinking about your future. You know that you will want to buy a house five years after you graduate and that you will want to put down €60 000. As of right now, you have €8000 in your savings account. You are also fairly certain that once you graduate, you can work in the family business and earn €32 000 a year, with a 5 per cent raise every year. You plan to live with your parents for the first two years after graduation, which will enable you to minimise your expenses and put away €10 000 each year. The next three years, you will have to live on your own as your younger sister will be graduating from college and has already announced her plan to move back into the family house. Thus, you will be able to save only 13 per cent of your annual salary. Assume that you will be able to invest savings from your salary at 7.2 per cent. | |||||||||
| What is the interest rate you need to invest the current savings account balance at in order to achieve your goal? | |||||||||
| Hint: Draw a timeline that shows all the cash flows for years 0 through 7. Remember, you want to buy a house seven years from now and your first salary will be in year three. First compute the salary levels and then the amount of money saved each year. Next, calculate the remaining amount needed to reach the goal. The final step involves solving for the rate of return required for the current savings balance to grow to the amount calculated in the previous step. Use both time value of money equations and as well as the FV financial function: FV(rate,nper,pmt,pv,type), the NPV function: NPV(rate,value1,value2, ...), and the RATE function: RATE(nper,pmt,pv,fv,type,guess). Make sure that all cells are properly formatted. | |||||||||
| Starting salary in year 3: | € 32,000 | ||||||||
| Annual pay increase: | 5.00% | ||||||||
| Savings in first 2 years: | € 20,000 | ||||||||
| Savings rate for years 3 - 7: | 13.00% | ||||||||
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | ||
| Salary | € 0.00 | € 0.00 | € 32,000.00 | € 33,600.00 | € 35,280.00 | € 37,044.00 | € 38,896.20 | ||
| Savings | € 0.00 | € 0.00 | € 10,000.00 | € 10,000.00 | € 4,586.40 | € 4,815.72 | € 5,056.51 | € 34,458.63 | |
| Investment rate: | 7.20% | ||||||||
| Future value of savings from salary (equation): | € 41,012.28 | 0+0+10000*(1.072)4 + 10000 * (1.072)3 +4586.40 (1.072)2 +4815.72(1.072)1+5056.51(1.072)0 | |||||||
| Future value of savings from salary (function): | |||||||||
| = | 41012.28 | ||||||||
| Target down payment: | € 60,000.00 | Target | 60000 | ||||||
| Target shortfall: | € 18,987.72 | shortfall | 18987.72 | ||||||
| Current savings balance: | € 8,000.00 | ||||||||
| Time to achieve target (years): | 7 | FV = | PV*(1+i)7 | ||||||
| 18987.72 =8000(1+i)7-1 | |||||||||
| Result (equation): | 13.1400% | 13.14% | |||||||
| Result (function): |
5-33
| Problem 5.33 | Present Value | ||||||
| Gunter Koch, a top-five draft pick of FC Bayern Munich, and his agent are evaluating three contract options. Each option offers a signing bonus and a series of payments over the life of the contract. Koch uses a 10.25 per cent rate of return to evaluate the contracts. | |||||||
| Given the cash flows for each option below, which one should he choose? | |||||||
| Year | Cash Flow Type | Option A | Option B | Option C | |||
| 0 | Signing Bonus | 3100000 | 4000000 | 4250000 | |||
| 1 | Annual Salary | 650000 | 825000 | 550000 | |||
| 2 | Annual Salary | 715000 | 850000 | 625000 | |||
| 3 | Annual Salary | 822250 | 925000 | 800000 | |||
| 4 | Annual Salary | 975000 | 1250000 | 900000 | |||
| 5 | Annual Salary | 1100000 | 1000000 | ||||
| 6 | Annual Salary | 1250000 | |||||
| Hint: Determine the present value of each option and compare. Create a solution using time value of money equations and then use the NPV financial function to solve: NPV(rate,value1,value2, ...). Make sure that all cells are properly formatted. | |||||||
| Option A | Option B | Option C | |||||
| Enter: | CF0 = | Enter: | CF0 = | Enter: | CF0 = | ||
| Enter: | CF1 = | Enter: | CF1 = | Enter: | CF1 = | ||
| Enter: | CF2 = | Enter: | CF2 = | Enter: | CF2 = | ||
| Enter: | CF3 = | Enter: | CF3 = | Enter: | CF3 = | ||
| Enter: | CF4 = | Enter: | CF4 = | Enter: | CF4 = | ||
| Enter: | CF5 = | Enter: | CF5 = | ||||
| Enter: | CF6 = | ||||||
| Enter: | I = | Enter: | I = | Enter: | I = | ||
| Results (equation): | PV0 = | ||||||
| Results (NPV function): | PV0 = | Result: | PV0 = | Result: | PV0 = | ||
| Given the analysis above, the best alternative for Gunter Koch is | . |
5-34
| Problem 5.34 | Time to Attain Goal | |||||
| Surmec, AG reported earnings (sales or net income) of €2.1 million last year. The company’s primary business line is manufacturing of nuts and bolts. Since this is a mature industry, the analysts are certain that the sales will grow at a steady rate of 7 per cent a year for as far as they can tell. The company reports net income that represents 23 per cent of sales. The management would like to buy a new fleet of trucks but can only do so once the profit reaches €620 000 a year. | ||||||
| At the end of what year will Surmec be able to buy the new fleet of trucks? | ||||||
| Hint: Determine the current level of net income based upon the information given. Create a solution that illustrates how long it will take for this current level of income to grow to the target profit level, first using time value of money equations and then the NPER financial function: NPER(rate,pmt,pv,fv,type). Make sure that all cells are properly formatted. | ||||||
| Current sales level: | ||||||
| Profit margin: | ||||||
| Current net income: | ||||||
| Target profit level: | ||||||
| Projected growth rate of sales: | ||||||
| Result in years (equation): | ||||||
| Result in years (NPER function): | ||||||
| The company will achieve its profit target during year | ||||||
| What will the sales and profit be that year? | ||||||
| Hint: Find the level of sales for the year in which the profit level is reached and then use this sales figure to compute the profit level. | ||||||
| Current sales level: | ||||||
| Projected growth rate of sales: | ||||||
| Target profit year: | ||||||
| Target year sales (equation): | ||||||
| Target year sales (FV function): | ||||||
| Target year profit: |
