Description
Unformatted Attachment Preview
Purchase answer to see full attachment
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...