04 May QuestionGENERAL PROBLEM
Question
GENERAL PROBLEMS
| Problems: |
| 1. FACTS: You have a one-time amount of $15,000 to invest in an associate’s business plan. She expects that you will receive $25,000 back at the end of three years. REQUIRED: If all goes according to plan, what will be the rate of return on your investment? |
| 2. FACTS: I have just received an inheritance. I’m thinking of investing some it in an account to be used to pay for my daughter’s college tuition some time in the future. I estimate that I’ll need $110,000 in 10 years. REQUIRED: Calculate how much I’ll need to invest now so that my initial deposit grows to become $110,000. Assume an 11% rate of return. |
| 3. FACTS: You just received an unexpected graduation gift: $2,000! You want to be smart with this money and decide to invest it so that you can use it as a downpayment when buying a house some time in the future. You think you’ll be ready to settle down and buy a house in 5 years. REQUIRED: Calculate how much this one-time deposit will be worth in 5 years assuming your investment earns 8% annually. |
| 4. FACTS: You are a Human Resources manager in charge of benefits and and need to fund the company’s recently approved incentive plan. The company’s estimated liability, to be paid 12 months from now is $125,000. REQUIRED: If you want to fully fund the plan now, how much will need to be invested today? Assume an 8.5 annual discount rate, compounded monthly. |
| 5. FACTS: You are a 30 year old college graduate and have just landed your first professional job. Your new employer sponsors a matching 401(k) plan. Suppose you will earn a $60,000 salary to start, you elect to defer 6% of your salary into your 401(k), and that your employer will match your contributions, up to 6% of your salary. REQUIRED: Assume an interest rate of 12%, compounded monthly. If you continue to fund your 401k monthly at this exact same amount until you reach the age of 65, how much will your 401(k) portfolio be valued at? |
| 6. FACTS: The CFO of the company you work for has asked you to lead a team that is charged with determining how much your company should offer as a purchase price for a small, profitable competitor. The competitor has had positive net cash flows of approximately $100,000 for each of the last few years. Your CFO believes this cash flow stream to be stable and that merging will increase it by 3% for at least the next 10 years. The company requires a 12% discount rate on similar decisions. REQUIRED: (a) Calculate a value of the competitor and hence a recommended purchase price. |
| 7. INSTRUCTIONS: Set up a loan amortization schedule given the following facts: The borrowed amount (original principle) is $150,000; the loan period is 5 years; the interest rate charged by the lender is 6%; payments are made quarterly. Use the |
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