Interest and Investment Calculations Guide
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ScribdTranslationsInterest and Investment Calculations Guide
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ScribdTranslations1.
Simple interest versus compound interest: First City Bank pays 9% simple interest
about the balances of their savings accounts, while Second City Bank pays 9%
compound interest and annually. If you made a deposit of 5,000 dollars in each
bank, how much would I earn in the Second City Bank problems account at the end of 10 years
2. Calculation of future values Calculate the future value of 1,000 dollars compounded
annually for
10 years at 6%.
b) 10 years at 9%.
20 years at 6%.
3. Calculation of present values For each of the following situations, calculate the value
present
Present value Years Interest rate Future value
6 7% $15,451
9 15 51,557
18 11 886 073
23 18 550 164
4. Calculation of interest rates Solve the unknown of the interest rate in each of
the following situations:
Present value Years Interest rate Valor futuro
2 $ 307
$ 242
9 896
410
162 181
51,700 15
30 483 500
18,750
5. Calculation of the number of periods Solve the unknown number of years in each
of the following situations:
Present value Years Interest rate Future value
$ 625 6% $ 1 284
810 13 4 341
18,400 32 402 662
21 500 16 173 439
6. Calculation of the payback period An investment project has annual cash flows of
income of 6,000, 6,500, 7,000 and 8,000 dollars, and a discount rate of
14%. What is the discounted payback period of these cash flows if the cost
Is the initial amount 8,000 dollars? What if the initial cost is 13,000 dollars? And what if it is 18,000?
7. Calculation of the discounted payback period. An investment project costs
10,000 dollars and has annual cash flows of 2,600 dollars for six years. What
Is the discounted recovery period if the discount rate is 0%? And what if the rate is
Is the discount 10%? What if it's 15%?
8. Calculation of the profitability index Bill plans to open a personal grooming center
self-service in a warehouse. The work team will have a cost of 190,000 dollars, which
It must be paid immediately. Bill expects after-tax cash flows of 65.
000 dollars annually for seven years, after which he plans to dispose of the equipment and
retreating to the beaches of Nevis. The first influx of effect occurs at the end of the first
year. Suppose the required return is 15%. What will be the IR of the project?
Should it be accepted?
9. Comparison of investment criteria You are a senior executive of Boeing Aircraft and
I have authorization to spend up to 400,000 dollars on projects. The three projects that
is analyzing having the following characteristics:
Project A: Initial investment of 280,000 dollars. Cash flow of 190,000.
dollars in year 1 and 170,000 in year 2. It is an expansion project of the
the plant and the required rate of return is 10 percent.
Project B: Initial investment of 390,000 dollars. Cash flow of 270,000.
dollars in year 1 and 240,000 in year 2. It is a development project of a
new product and the required rate of return is 20 percent.
Project C: Initial investment of 230,000 dollars. Cash flow of 160,000.
dollars in year 1 and 190,000 in year 2. It is an expansion project of
market, where the required rate of return is 15 percent
Assume that the corporate discount rate is 10 percent.
Offer your recommendations based on your own analysis
A B C Implications
Recovery period
TIR
TIR incremental
IR
VPN
10. Recovery period and VPN An investment that is under consideration has a
a payback period of six years and a cost of 574,000 dollars. If the return
requerido es de 12%, ¿cuál es el VPN del peor caso? ¿Y el VPN del mejor caso? Explique.
Assume that the cash flows are conventional.
11. Comparison of mutually exclusive projects Hagar Industrial Systems
Company (HISC) must decide between two different conveyor belt systems. The
The Atene system has a cost of 360,000 dollars, a lifespan of four years, and requires 105,000.
dollars in annual operating costs before taxes. The B system has a cost of
480,000 dollars, a life of six years, and requires 65,000 dollars in operating costs.
annual before taxes. Both systems should be depreciated straight-line to zero
during their respective life cycle and will have a salvage value of zero. Anyone who
whichever system is chosen, it will not be replaced when it has worn out. If the rate
The tax rate is 34% and the discount rate is 11%, what system should the company choose?
12. Comparison of mutually exclusive projects Suppose in the previous problem
HISC needs a conveyor belt system; when one of them wears out.
It should be replaced. What system should the company choose now?
13. Comparison of mutually exclusive projects Vandalay Industries wishes to
buy a new machine for latex production. The machine costs
2,400,000 dollars and it will last six years. Variable costs are 35% of sales and the
Fixed costs amount to 180,000 dollars annually. Machine B has a cost of 5,400.
000 dollars and will last nine years. The variable costs of this machine are 30% and the
fixed costs amount to 110,000 dollars per year. The sales of each machine will be 10.5
millions of dollars per year. The required return is 10% and the tax rate is
35%. Both machines will depreciate on a straight line. If the company plans to replace
perpetuity the machine when it wears out, what machine should you choose?
14. Capital budget with inflation Consider the following cash flows of two
mutually exclusive projects:
Year Project A Project B
0 2$50,000 265,000
1 30 000 29,000
2 25,000 38,000
3 20,000 41,000
The cash flows of project A are expressed in real terms, while those of
Project B is stated in nominal terms. The appropriate nominal discount rate
It is 15% and the inflation rate is 4%. Which project should be chosen?
15. Inflation and value of the company Sparkling Water, Inc., expects to sell 2.1 million
bottles of drinking water each year in perpetuity. This year each bottle will be sold for 1.25
dollars in real terms and will cost .75 dollars in real terms. The
revenues from sales and costs occur at the end of the year. Revenues will increase to a
real rate of 6% per year, while real costs will increase at a real rate of 5%
year. The real discount rate is 10%. The corporate tax rate is 34%. What
What is the current value of Sparkling Water?
16. Valuation of zero coupon bonds Indicate what price a zero coupon bond will have in 10 years that pays
1000 dollars at maturity, if the yield to maturity is:
5%
b) 10%
c) 15%
17. Valuation of bonds Microhard has issued a bond with the following characteristics:
Par value: 1,000 dollars
Time until expiration: 25 years
Coupon rate: 7%
Semiannual payments
Calculate the price of this bond if the yield to maturity is:
7%
b) 9%
c) 5%
[Link] Waters Umbrella Corp. issued 12-year bonds two years ago, with
coupon rate of 7.8%. The bond will make semiannual payments. If today these bonds are sold at 105%
at par value, what will the yield at maturity be?