5_75507_11284893_Case 12
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Virginia Commonwealth University *
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HADM-608
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Finance
Date
Apr 3, 2024
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1. Which bank should Gary choose for a savings account, which bank for a CD, and which bank for
a term loan?
a)
Savings Account- Bank South b)
CD- SunTrust
c)
Term Loan- Bank South
2. Gary will invest the donations from a wealthy investor in CDs. How much will the Center have accumulated on the day of the last donation? (Use the CD interest rate offered by the bank you selected for a CD in Question 1.)
$1,910, 729
3. If the Center takes out a 5-year term loan, it would be repaid in equal annual installments. However, suppose Gary decides to pay off the remaining balance of the loan at the end of the third year (after the loan payment for the third year). How much will this final payment be? (Use the term loan interest rate offered by the bank you selected for a term loan in Question 1.)
Remaining balance after year 3 and what Gary would owe would be $105,975.
4. If the Center takes out a 7-year term loan that would be repaid in different annual installments, with the first payment due at the end of Year 1, how much would the fixed annual installment be at the end of each year from Year 4 through Year 7? (Use the term loan interest rate offered by the bank
you selected for a term loan in Question 1.)
(35,147)
5. Gary will invest the contributions to the board-designated building fund in CDs. How much will the equal annual contributions in Years 5, 6, and 7 have to be to ensure the Center will have sufficient funds to pay for projected facility renovations? (Use the CD interest rate offered by the bank you selected for a CD in Question 1.) (Hint: Use a timeline to lay out the Years 0 to 4 and Years 8 to 11 annual cash flows and then use Goal Seek in Excel to solve for the Years 5 to 7 cash flows.)
Year 0: $15,000,000 Year 1-4: $5,000,000
Year 5-7: $10,742,127
6. In your opinion, what are three key learning points from this case?
●
When looking at Saving accounts and CDs, you want the larger EAR. When looking at term loans
you want the lower EAR.
●
TVM helps forecast future cash flows, evaluate investment opportunities, and make informed financial decisions
●
Discounting future cash flows and considering opportunity costs help assess the true value of financial options
●
The importance of risk management and diversification in investment strategies. The case presents different methods of investing donations and managing cash flows over multiple years, each with its own risk-return profile. By diversifying investments across different assets or strategies, individuals or organizations can mitigate risks and enhance overall portfolio resilience.
●
The case highlights the significance of strategic financial planning, particularly in terms of choosing appropriate banking products and investment strategies. It demonstrates how different compounding periods, interest rates, and repayment structures can impact the overall financial outcomes. By carefully analyzing and selecting the most suitable options, individuals or organizations can optimize their financial positions and achieve their goals more effectively.
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