FIN 370 Week 2 LAB for promotion work

1: Within the financial markets there are three principal sets of player that interact.......are the one who have money to invest, including individuals accumulating money for a down payment and business that have excess cash ......... are those who need money to finance their purchases such as a business expanding its inventory.......... brings savers and borrowers together

2: Leslie Mosallam, who recently sold her Porsche, placed $10,000 in a savings account paying annual compound interest of 6%.

a. Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 1, 5, and 15 years.

b. Suppose Leslie moves her money into an account that pays 8% or one that pays 10%. Rework part (a) using 8% and 10%.

c. What conclusions can you draw about the relationship between interest rates, time, and future sums from the calculations you just did?

3: (Related to checkpoint 5.4) (present value) Sarah Wiggum like to make a single investment and have $ 2.0 million at the time of her retirement in 35 years. she has found a mutual fund that will earn 4 percent annually. How much will Sarah have to invest today? If srah earned an annual return of 14 percent, how soon could she then retire?

a. If Sarah can earn 4 percent annually for the next 35 years, the amount of money she will have to invest today is $.......

b.If sarah can earn an annual return of 14 percent, the number of years until she could reire is .... years.

4: (Related to checkpoint 5.5) (solving for n)How many years will it take for $500 to grow to $1,048.85 if it,s invested at 6 percent compounded annually?

The number of years it will take for $500 to grow to $1,048.85 at 6 percent annually is ...... years?

5: Lance Murdock purchased a wooden statue of a Conquistador for $7,600 to put in his home office 7 years ago. Lance has recently married, and his home office is being converted into a sewing room. His new wife, who has far better taste than Lance, thinks the Conquistador is hideous and must go immediately. Lance decided to sell it n e-bay and only received $5,200 for it, and so he took a loss on the investment. What was his rate of return, that is, the value of i?

6: (Future value of an ordinary annunity) what is the future value of $ 500 per year for 10 years compounded annually at 5 percent?

the future value of $ 500 per year for 10 years compounded annually at 5 percent is ............

7: (Present value of an ordinary annuity) what is the present value of $3,500 per year for 9 years discounted back to the present at 10 percent?

the present value of $3,500 per year for 9 years discounted back to the present at 10 percent is .........

8:(Present value of a growing perpetuity) What is the present value of a perpetual stream of cash flows that pays $30,000 at the end of year one and then grows at arate of 5% per year indefinitely ? The rate of interest used to discount the cash flows is 9%

The present value of the growing perpetuity is

9:(Present value of complex cash flows) How much do you have to deposit today so that beginning 11 years from now you can withdraw $10,000 ayear for the next 5 years(periods 11 through 15)plus an additional amount of $20,000 in the last year (period 15)? Assume an interest rate of 6 percent

The amount of money you have to deposit today is

10: Peterson Trucking is contemplating the acquisition of Armour Transport, a competing trucking firm,and estimates that durilg the next year Armour Transport's flows from the acquisition will varydepending upon the state of the looal economy:

a.calculate the expected cash flow for next year using the estimates provided above.

b. Assume the probility of a recession increases to 46 percent, the normal scenario probility remains at 47 percent, and the expansion probilty drops to only 7%. what is yor estimate of the expected cash flow for next year under these circumstances?

c.your analysis of the acquisition suggests that for the investment to have at least a zero NPV, it must produce an annual expected cash flow of 88,550 per year over the next 5 years. Assuming that the cash flow you estimated in part a is the expected cash flow for years one through five, what would you like to know about the project cash flows to make you more comfortable with the idea that you can generate the requisite 88,550 per year cash flow? (no computations required)

11: (Forecating revenues using scenario analysis) Floating Homes, Inc. is a manufacturer for luxuary potion pontoon and house boat that sell for $40,000 to 100,000. To estimate its revenue for the following year, Floating Homes divided its boat sales itnti 3 categories based on selling price (high, low, medium) and estimates the number of units it expects to selll under three diferent economic scenarios.

These scenarios include a recession (scenario 1) , a continuation of current conditions in which the economy is level (scenario 2), and a strong economy (scenario 3), Using these estimates, calculate the expected revenue for floating homes, Inc. for the following year.

the expected revenue for floating homes, Inc. for the following year is …………

12: The marvel mfg. company is considering whether or not to construct a new robotic production facility. The cost of this new facility is $618,000 and it is expected to have a six-year life with annual depreciation expense of $103,000 and no salvage value. Annual sales from the new facility are expected to be 1,960 units with a price of $1,010 per unit. Variably production costs are $610 per unit, while fixed cash expenses are $78,000 per year.

A. Find the accounting and the cash break-even units of production

B. Will the plane make a profit based on its current expected level of operations?

C. Will the plant contribute cash flow to the firm at the expected level of operations?

13: (Break-even analysis) Farrington Enterprises runs a number of sporting goods

businesses and is currently analyzing a new T-shirt printing business. Specifically, the

company is evaluating the feasibility of this business based on its estimates of unit sales,

the price per unit, variable cost per unit and fixed costs. The company’s initial estimates

of annual sales and other critical variables are as follows:

Base-Case

Unit sales 5,000

Price per unit $12.00

Variable cost per unit 8.00

Fixed cash expense per year 10,000

Depreciation expense 5,000

ISBN 1-256-14785-0

Financial Management: Principles and Applications, Eleventh Edition, by Sheridan Titman, John D. Martin, and Arthur J. Keown. Published by Prentice Hall.

t ©bay P ejarosonk Edauc atjioon, Iknc.

450 PART 3 | Capital Budgeting

a. Calculate the accounting and cash break-even annual sales volume in units.

b. Bill Farrington is the grandson of the founder of the company and is currently enrolled

in his junior year at the local state university. After reviewing the accounting breakeven

calculation done in part a. Bill wondered if the depreciation expense should be

included in the calculation. Bill had just completed his first finance class and was well

aware that depreciation is not an actual out-of-pocket expense but an allocation of the

cost of the printing equipment used in the business over its useful life. What do you

think? What do the cash and accounting break-even points tell you?

14: (Percent of sales forecasting) Which of the following accounts would most likely vary directly with the level of a firm's sales? Discuss each briefly.

Yes No Yes No

Cash ___ ___ Notes payable ___ ____

Marketable securities ___ ___ Plant and equipment ___ ____

Accounts payable ___ ___ Inventories ___ ____