BU340 Mangerial Finance I Assignment 4

docx

School

Ashworth College *

*We aren’t endorsed by this school

Course

EC370

Subject

Accounting

Date

Apr 3, 2024

Type

docx

Pages

Uploaded by JusticeRamPerson6568

Jennifer Egan AC0525806 BU340 Managerial Finance I Assignment 4 January 25, 2024 Part A We can find the future value of this cash flow using the formula, FV=PV(1+r)^n, where “r” represents the interest rate and “n” represents the number of years. 1. The future value of the cash flow at 6% is as follows: Year 1 $15,000(1+.06)^6= $21,277.79 Year 2 $20,000(1+.06)^5= $26,764.51 Year 3 $30,000(1+.06)^4= $37,874.31 Year 4-6 There is no cash inflow so these years would remain at $37,874.31 Year 7 $150,000(1+.06)^0= $150,000 21,277.79 + 26,764.51 + 37,874.31 + 150,000 = 235,916.61 The cash inflow at the end of year 7 at 6% would be $235,916.61. 2. The future value of the cash flow at 9% is as follows: Year 1 $15,000(1+.09)^6= $25,156.50 Year 2 $20,000(1+.09)^5= $30,772.48

Year 3 $30,000(1+.09)^4= $42,347.45 Year 4-6 There is no cash flow so these years would remain at $42,347.45 Year 7 $150,000(1+.09)^0= $150,000 24,156.50 + 30,772.48 + 42,347.45 + 150,000= 247,276.43 The cash inflow at the end of year 7 with 9% interest would be $247,276.43. 3. The future value of the cash flow at 15% is as follows: Year 1 $15,000(1+.15)^6= $ 34,695.91 Year 2 $20,000(1+.15)^5= $ 40,227.14 Year 3 $30,000(1+.15)^4= $ 52,470.19 Year 4-6 There is no cash flow so these years would remain at $ 52,470.19 Year 7 $150,000(1+.15)^0= $150,000 34,695.91 + 40,227.14 + 52,470.19+ 150,000= 277,393.24 The cash inflow at the end of year 7 with 15% interest would be $277,393.24. Part B Using the formula, PV = PMT x PVIFA, where PVIFA = ( 1 - [ 1 / ( 1 + r ) ^ n ] ) / r, the selling price can be found. PMT = $500, r = 6% or .06, and n = 25 PVIFA = ( 1 – [ 1 / (1 + .06 ) ^ 25 ] ) / .06 = ( 1 – [ 1 / (1.06 ) ^ 25 ] ) / .06

= ( 1 – [ 1 / 4.2918707 ] ) / .06 = ( 1 – .2329986 ] ) / .06 = .7670014 / .06 = 12.7833566 PV = 500 x 12.7833566 = 6,391.6783333 The selling price should be $6,391.68. Part C Using a financial calculator, we can find the necessary interest rate for the trust to break even. In “End” mode, input 25 for N (number of periods), $2,000,000 for PV (present value), -$150,000 for PMT, and $0 for FV (future value). I/Y then equals 5.562%. In order for the trust to break even, the investment rate must be 5.562%. Part D a. Investment rate over the next 20 years is 8%: Using a financial calculator, input 20 for “N”, 8% for “I/Y”, $-250,000 for “PMT” and $0 for “FV”. The total of installment payments would equal $2,454,536.85. I would choose the lump sum payoff of $2,500,000 since that is more. b. Investment rate over the next 20 years is 5%:

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Using a financial calculator, input 20 for “N”, 5% for “I/Y”, $-250,000 for “PMT” and $0 for “FV”. The total of installment payments would equal $3,115,552.59. In this case, I would take the installment payments since the total would be more then the $2,500,00 lump sum. c. To find the investment rate that would break even: Using a financial calculator, input 20 for “N”, $2,867,480 for “PV”, -$250,000 for “PMT” and $0 for “FV”. The interest rate of 6% makes the annuity stream and lump sum payment equal.