BCO 126 EUBS Banks Offering an Average Annual Rate Question

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Economics

BCO 126

EU Business School Geneva

BCO

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BCO126 MATHEMATICS OF FINANCE RESIT - Task brief & rubrics Task General instructions: 1. 2. 3. 4. 5. 6. Save this Word document in your computer and name your file: RESIT_xxxxxxx.docx (where xxxxxxx is your last name) In this document write your explained answers on the lines. Use a blank sheet of paper to hand-write your formulas and your workings to obtain the result for each question. Include each question number and highlight each final result. Take a picture of each page and attach them to this Word document. Upload this word file to the Moodle link called “Submission point”. Details of the task: • • • This assignment must be performed individually Structure: 5 questions (percentages shown at the end of each question) All questions must include workings and a reasoned answer, not just the final number. Task content: Read the following context; Our company is facing a challenging time. Potential shifting trends towards new technologies had apparently caused a reduction in our demand, that has been decreasing during the last years. In order to adapt to the future circumstances, the following different scenarios are being considered: ▪ ▪ ▪ Changing the production line to adapt to the market trends. Investing in different projects to adapt to the new situation. Selling the plant. Question 1 We want to acquire a new equipment for a price of $150,000. Considering that the banks are currently offering an average annual rate of 5%, calculate each of the following investment options and explain which is more attractive in order to be able to obtain the $150,000 that we need, based on those calculations. Please show your workings for each option. a) Investing 90,000 in a product that offers an annual interest of 5% compounded quarterly for 10 years to produce $150,000. b) Investing 90,000 in a product that offers annual 6,5% simple interest for 10 years. c) Investing 90,000 in a project that will produce annual cashflows of $15,100 for 10 years. Best option: (30%) Question 2 From a project we could expect to obtain net revenues of $650,000 per year for at least the next 10 years, if we adapt our production line, in order to produce some new parts. Considering this situation a) What is the maximum that we should invest on this project if we consider a cost of capital of 4%? b) If this project required an initial investment of $4,000,000, what would be its NPV consider a cost of capital of 4%? c) What is its payback period given that the initial investment is $4,000,000? (30%) Question 3 Another project would produce net revenues of $180,000 per year, for 9 years. These revenues are expected to grow at a constant 0,5% per year, and are assessed at a cost of capital of 2,5%: a) Would it still be profitable if it required an initial investment of $1,900,000? b) If we invest these annual revenues of $180,000 growing at a 0,5% per year in a bank account that offers an annual rate of 4% for 9 years, how much will we have at the end? (20%) Question 4 A potential client has offered the possibility to sign a contract that will start in 5 years. This contract is signed for annual revenues of $600,000. a) What is the maximum amount of money we could afford to invest if we want a profitability of at least 5%? (10%) Question 5 Considering that our plant produces annual revenues of $260,000 decreasing at a 1,2% annual, and it is expected to last for a very long time. a) For how would investors buy the plant if they wanted to obtain a profitability of at least a 6%? (10%) Formalities: • • • • Word count: between 1000-1500 words Font: Arial 12,5 pts. Text alignment: Justified. The formulas and procedures to obtain the result must be included. It assesses the following learning outcomes: • • • • • • • • • • to understand the concept of time value of money to distinguish between simple and compound interest rates to understand the concept of rate of return of a project in finance to understand the concept of net present value and payback period to demonstrate an ability to apply the technical skills related to the course in a practical context to assess the present value of future cash flows and the future value of regular savings, annually and periodically to understand the perpetuity and annuity valuation and their factors – annual and periodical – and with various starting dates with and without growth to assess the future revenue generation of a regular savings scheme and the amount needed to be saved over time to meet a future series of payments to understand the process of investments appraisal and projects classification to determine percentage calculations and discounting Rubrics Rubrics 9-10 8-8.9 7-7.9 6-6.9 3-5.9 1-2.9 0 Descriptor The student constructs a well-reasoned conclusion from accurate calculations that demonstrate an excellent understanding of the concepts. The student arrives at a good conclusion with mostly accurate calculations, demonstrating a good understanding of the concepts. The student makes a fair conclusion despite some inaccuracies in the calculations. The student’s understanding of the concepts is fair. Several inaccuracies and incoherent or incomplete conclusion. The student demonstrates some, but insufficient understanding of the concepts. Systematic inaccuracies and incoherent/incomplete or missing conclusions. The student demonstrates insufficient understanding of the concepts. They may mention some relevant ideas or concepts, although it is clear that the relationship between them is not understood by the student. The student demonstrates insufficient understanding of the concepts and does not include any relevant calculations. The student leaves the question blank or cheats. Points are stated at the end of each question.
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Explanation & Answer

View attached explanation and answer. Let me know if you have any questions.Hi, I finished. I used Excel to solve the problems and then explained the formulas used. That is why I'm uploading both the Excel spreadsheet and the Word doc.

BCO126

MATHEMATICS OF FINANCE

RESIT - Task brief & rubrics

Task
General instructions:
1.
2.
3.
4.
5.
6.

Save this Word document in your computer and name your file: RESIT_xxxxxxx.docx (where xxxxxxx is your last name)
In this document write your explained answers on the lines.
Use a blank sheet of paper to hand-write your formulas and your workings to obtain the result for each question.
Include each question number and highlight each final result.
Take a picture of each page and attach them to this Word document.
Upload this word file to the Moodle link called “Submission point”.

Details of the task:




This assignment must be performed individually
Structure: 5 questions (percentages shown at the end of each question)
All questions must include workings and a reasoned answer, not just the final number.

Task content:

Read the following context;
Our company is facing a challenging time. Potential shifting trends towards new technologies had apparently caused a reduction in our demand, that has
been decreasing during the last years. In order to adapt to the future circumstances, the following different scenarios are being considered:




Changing the production line to adapt to the market trends.
Investing in different projects to adapt to the new situation.
Selling the plant.

Question 1
We want to acquire a new equipment for a price of $150,000. Considering that the banks are currently offering an average annual rate of 5%, calculate
each of the following investment options and explain which is more attractive in order to be able to obtain the $150,000 that we need, based on those
calculations. Please show your workings for each option.
a) Investing 90,000 in a product that offers an annual interest of 5% compounded quarterly for 10 years to produce $150,000.
b) Investing 90,000 in a product that offers annual 6,5% simple interest for 10 years.
c) Investing 90,000 in a project that will produce annual cashflows of $15,100 for 10 years.
Best option:
The time value of money is one of the main premises in finance since “one dollar today, is worth more than one dollar tomorrow”. In simple words, an
amount of money X that you possess today can be either spent in acquiring goods or you can invest it and have an amount of money equal to X + Y in
the future. The future value of money is determined by three factors:
1. Time: the longer the time, the higher the future value.
2. Interest rate: the higher the interest rate, the higher the future value.
3. Compounding period: the shorter the compounding period, the higher the future value.
We can also adapt the future value formula in order to determine the present value of an investment. The future cash flows associated to an investment
are discounted at a specific rate and the investment with the highest present value is the best option.
The cash flows associated to each alternative are:

Year
0
1
2
3
4
5
6
7
8
9
10

Cash flow
-$90,000
$0
$0
$0
$0
$0
$0
$0
$0
$0
$147,926

Alternative A
Formulas used:
Discount rate
5.00%
IRR
5.09%
IRR function

90000*(1+5%/4)^(4*10)

NPV
$813.58
NPV function -90000

Year
0
1
2
3
4
5
6
7
8
9
10

Cash flow
-$90,000
$5,850
$5,850
$5,850
$5,850
$5,850
$5,850
$5,850
$5,850
$5,850
$95,850

Alternative B
Formulas used:
90000*6.5%
90000*6.5%
90000*6.5%
90000*6.5%
90000*6.5%
90000*6.5%
90000*6.5%
90000*6.5%
90000*6.5%
90000*6.5%+90000

Discount rate
5.00%
IRR
6.50%
IRR function
NPV...


Anonymous
I was having a hard time with this subject, and this was a great help.

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