Week Two Financial Exercises Part 1 Complete the following problems using either the financial functions in Excel or the Present Value and Future Value formulas as noted below: PV = FV * 1 / (1+i)^n FV = PV * (1+i)^n (1) If you wish to have $60,000 in 8 years, how much do you need to deposit in the bank today if the account pays an interest rate of 9%? Answer: (2) What will $110,000 grow to be in 9 years if it is invested today at 11%? Answer: (3) (4) You would like to have $200,000 in a college fund in 15 years. How much do you need today if you expect to earn 12% while you are investing to pay for your child’s college? Answer: You have been offered $3,000 in 4 years for providing $2,000 today into a business venture with a friend. If interest rates are 10%, is this a good investment for you? Answer: (5) What will $82,000 grow to be in 11 years if it is invested today at 8% and the interest rate is compounded monthly? Answer: (6) How many years will it take for $136,000 to grow to $468,000 if it is invested in an account with an annual interest rate of 8% Answer: (7) At what interest rate must $112,000 be invested so that it will be worth $392,000 in 14 years? Answer: Week Two Financial Exercises Part 2 Complete the following problems: (1) Calculate the Net Present Value (NPV) of the following cash flow stream if the required rate is 12%: Year Cash Flow 0 (230,000) 1 60,000 2 60,000 3 60,000 4 60,000 5 60,000 Is this a good project for the business to accept? Explain why or why not. Answer: (2) Calculate the Net Present Value (NPV) of the following cash flow projections based on a required rate of 10.5%: Year Cash Flow 0 (120,000) 1 35,000 2 47,500 3 55,000 4 62,000 Is this a good project for the business to accept? Explain why or why not. Answer: (3) A company needs to decide if it will move forward with two new products that it is evaluating. The two initiatives have the following cash flow projections: Project A Year Cash Flow 0 -800,000 1 220,000 2 265,000 3 292,000 4 317,000 Year Cash Flow 0 -650,000 1 175,000 2 175,000 3 175,000 4 175,000 Project B 5 175,000 Based on the risk of each project, the company has a required rate of return of 11% for Project A and 11.5% for Project B. The company has a $1.5 million budget to spend on new projects for the year. Should the company move forward with one, both, or neither of the two new products? Show your work to support your answer. Answer: (4) Calculate the internal rate of return (IRR) of the following cash flows: Year Cash Flow 0 (1,650,000) 1 330,000 2 365,000 3 380,000 4 415,000 5 405,000 6 370000 7 294,000 Answer: (5) If a company has a required rate of return of 15%, should the following project be accepted based on these expected cash flows below? Year 0 1 2 3 4 5 6 Cash Flow (274,000) 68,000 73,000 76,500 78,000 82,500 77,000 Please explain why or why not the company should move forward with this endeavor. Answer: (6) Based on the investor expectations of earning at least 12%, should this projected below be completed? Year 0 1 2 3 4 5 Cash Flow (133,000) 37,000 42,750 44,000 46,500 82,500 Please explain why or why not the company should move forward with this endeavor. Answer: 6 77,000
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