Professional Documents
Culture Documents
Lugar Industries is considering an investment in a new machine with the following information:
Machine cost
Setup cost
Salvage value
Life
Net operating expense savings:
225000
25000
50000
5 years
End of Year 1
End of Year 2
End of Year 3
End of Year 4
End of Year 5
WACC
Tax rate
Assumed value of the machine at end of 5 years =
Cumulative
Saving
50000
140000
250000
370000
490000
10%
40%
1 Payback Period. Enter you answer and carry it out two decimal places. (For example a 2 year payback is e
Ans
Machine Cost
Setup Cost
Total Cost
Payback Period
=
=
=
=
225000
25000
250000
3.00 years
Ans
Discounted Payback Period. Enter you answer and carry it out two decimal places. (For example a 2 year d
WACC
End Of
Year
1
2
10%
PV Of Per Cukulative PV Of
Per Year Saving Year Savings PEr Year Savings
50000
45455
45455
90000
74380
119835
3
4
5
110000
120000
120000
82645
81962
74511
202479
284441
358952
Total Cost
358952
Payback Period
5.00
Calculate the NPV. Round you answer to the nearest whole number. Do not use $, commas, or decimal poi
Ans
End Of Year
0
1
2
3
4
5
WACC
10%
NPV
4
Based on the above information, calculate the IRR. Round you answer to the nearest two decimal places.
entered as 34.46.
Ans
End Of Year
Per Year Saving
IRR
0
-358952
10.00
50000
90000
How much would a person need to invest in a retirement account each year based on the following assump
55
250000
10
60000
4%
15
9%
7%
13.36%
11.28%
*Assume the first retirement payment is available immediately upon retirement at the end of year 10.
6
Ans
Yearly amount of savings. Round you answer to the nearest whole number. Do not use $, commas, or deci
$34,567.50 would be entered as 34568.
Time Line
Age
Number Of Years
Current Retirement A/C Bal
Retirement Income In Today's D
PV of Retiral Benefits
Additional Investment Needed
55
0
250000
60000
$269,332
$19,332
56
1
57
2
Problem
For this question only, assume that you are living in the U.S. and the economy has been doing well for the
expereince this in the near future again. Assume the following information regarding the economy:
Current Unemployment Rate
GDP growth rate for past 4 years
Current Fed Funds Rate
Current 30 Year Mortgage Rate
Stock Market
Inflation rate for the past 4 years
7
5%
3.2% average
4.5%
7%
Historic Highs
3.5% average
If you are invested primarily in stocks as opposed to bonds, why might a recession hurt
Because in case of bonds we receive fixed income, but in caseof stock, there is no such fixed income. Mor
stocks, because of the stock price depreciation expectations.
Ans
Ans
If you do not expect a recession for at least 2 more years but expect an annual 5% inflation rate for each of
market or the bond market? Base your answer only on the impact of interest rate change. Explain.
If we do not expect recession for at least 2 more years, with expectations of 5% inflation rate, I would pref
return , which would take care inflation, whereas if I invest in bond, this may not happen.
Problem
Please use the following facts to analyze this problem:
Assume you just received a bill for services you and have the following two payment options:
Option 1:
Pay the entire bill of $600 now
Or
Option 2:
Pay:$130 now And$130 for each of the next 4 months
Ans
10
Ans
What annual interest rate (APR) are you paying if you choose Option 2? Assume monthly compounding.
$, commas or %. For example, 25.34% would be entered as 25.34.
Entire Amount
=
=
Rate of interst
=
=
600
$
130
4
9.62% (Excel "RATE" Function Is Used)
9.62
What effective annual interest rate (EAR) are you paying if you choose Option 2? Assume monthly compo
not use $, commas or %. For example, 25.34% would be entered as 25.34.
Effective Annual Rate
=
=
10.06%
10.06
11
Ans
12
Ans
500
300
8%
15000
25
7%
19500
WHat is the NPV of the lease? Round you answer to the nearest whole number. Do not use $, commas, o
$34,567.50 would be entered as 34568.
Discount Rate
Lease Term In Months
Monthly lease payment
=
=
=
7%
24
300
What would it cost you to buy the car today if you were paying cash? Round you answer to the nearest wh
as a positive number. For example, $34,567.50 would be entered as 34568.
Discount Rate
Lease Term In Months
No of months
Lease Down Payment
Monthly Lease Payment
Lease Buyout at end
Sales Tax @8%
Effective Cash Flows
Cost of Car
=
=
7%
24
0
500
1
300
500
300
$21,166 (Excel "NPV" Function Is Used)
(Assumption: Here assume that, car would be purchased in cash at the end of the leasse and there would b
13 If you lease this vehicle, are you paying a fair price for the lease? Explain
Ans
No, cause the cost of car as per lease is more as compared to purchase of vehicle outright.
14
Ans
The habit of spending a monthly amount of money has both a net present value impact and a future value i
currently spending $1,800 a year on cigarettes the financial impact of this habit. Do not focus on the healt
this habit on a NPV basis and a Future Value basis. Use the following assumptions to help in your calcula
Average Inflation rate for the cost of cigarettes
5%
Use a 20 year time period and compound yearly.
Assume a discount rate of 7% for NPV and 7% for the potential earnings if those dollars are invested inste
Discount Rate
Current Spending on Cigarette
Time Period
NPV
7%
1800
20
$19,069
lowing information:
$50,000
Years
use $, commas, or decimal points) (For example, $34,567.50 would be entered as 34568.
e nearest two decimal places. Do not use %) (For example, 34.4550% would be
110000
120000
120000
Do not use $, commas, or decimal points ans enter as a positive number. For example,
58
3
59
4
60
5
61
6
62
7
63
8
my has been doing well for the past 4 years. This is not the case right now but hopefully we will
egarding the economy:
s, why might a recession hurt your investment portfolio? Explain your answer.
64
9
772820.34
e is no such fixed income. Moreover, when there is recession, no one would like to invest in
al 5% inflation rate for each of the next two years, would you rather be invested in the stock
rate change. Explain.
payment options:
sume monthly compounding. Round you answer to the nearest two decimal points. Do not use
on 2? Assume monthly compounding. Round you answer to the nearest two decimal points. Do
mber. Do not use $, commas, or decimal points and enter as a positive number. For example,
d you answer to the nearest whole number. Do not use $, commas, or decimal points and enter
300
300
300
300
300
300
300
300
300
300
300
300
300
300
of the leasse and there would be sales tax to paid on and above the sale price.)
hicle outright.
lue impact and a future value impact. Assume you have been asked to show a 20 year old who is
abit. Do not focus on the health issues or even the potential health costs. Just show the impact of
mptions to help in your calculations:
Years
(Excel "PV" Function Is Used)
65
10
66
11
67
12
68
13
69
14
70
15
71
16
10
11
12
13
14
15
300
300
300
300
300
300
300
300
300
300
300
300
300
300
72
17
73
18
74
19
75
20
76
21
77
22
78
23
16
17
18
19
20
21
22
300
300
300
300
300
300
300
300
300
300
300
300
300
300
79
24
23
24
300
300
15000
1200
16500
300