Question

A COMPANY HAS A CASH FLOW STREAMS FROM YEAR 1 TO 3 TO TOTALING 30000. MANAGEMENT HAS PROVIDED YOU WITH THE FOLLOWING INFORMATION TO ASSIST THEM IN CHOOSING THE BEST CASH FLOW STREAMS.

STREAMS YEAR 1 YEAR 2 YEAR 3 TOTAL

A 2500 7500 20000 30000

B 10000 10000 10000 30000

C 20000 7500 2500 30000

D 2500 20000 7500 30000

REQUIRED:

ASSUMING THE INTEREST RATE IS GREATER THAN ZERO. WHICH OF THE CASH INFLOW STREAMS WILL YOU RECOMMEND FOR THE COMPANY AND WHY?

B. IN-CHARGE BANK PAYS 9%, COMPOUNDED DAILY (BASED ON 360-DAYS), ON 8-MONTH CERTIFICATE OF DEPOSIT. ASSUME THERE IS 30 DAYS IN EACH MONTH.

REQUIRED;

HOW MUCH WILL YOU TAKE HOME AT THE END OF THE PERIOD IF YOU DEPOSIT 7500.

C. YOU HAVE BEEN OFFERED AN INVESTMENT THAT WILL PAY YOU 9% PER ANNUM. IF YOU INVEST 15000 HOW LONG WILL IT TAKE YOU TO ACCUMULATE 30000

Answer 1

Part A:

Assuming interest rate of 1%, cash flow stream C has the highest PV, as below. Hence Cash Flow stream C is recommended.

1 J9 =SUM(16:18) A B С D E F G H J K L 1 Rate of return (Cost of capital) 1% 2 Year Disc rate PV Factor A B C D 3 (t) 1/(1+r)^t Cash Flow PV Cash Flow PV Cash Flow PV Cash Flow PV 4 (PVF) (CF) (CF*PVF) (CF) (CF*PVF) (CF) (CF*PVF) (CF) (CF* PVF) 5 0 1.000000 0.00 0.00 0.00 0.00 6 Cash flows 1% 0.990099 $2,500 2475.25 $10,000 9900.99 $20,000 19801.98 $2,500 2475.25 7 Cash flows 1% 0.980296 $7,500 7352.22 $10,000 9802.96 $7,500 7352.22 $20,000 19605.92 8 Cash flows 3 1% 0.970590 $20,000 19411.80 $10,000 9705.90 $2,500 2426.48 $7,500 7279.43 9 Sum of PVs 29239.27 29409.85 29580.68 29360.59 1 2

Part B:

Take home amount (maturity value) at the end of the term= P*(1+R/360)^N

Where

P= Amount of deposit (given as 7,500)

R= Interest rate (given as 9%) and N= Period number of days (given as 8 months *30 days = 240)

Plugging these values,

Maturity value= 7500*(1+9%/360)^240 = 7500* 1.061828584 = 7,963.71

Part C:

Given,

Interest rate= 9%

Deposit amount= 15,000 and Maturity value= 30,000

Therefore, FVIF= (1+9%)^n =30000/15000 = 2

1.09^n = 2

Time required (value of n in the above equation= 8.04 years as follows:

4 A D 1 If Aan = B, then In (A^n) = In (B). Therefore, n*(In A) = In (B) 2 Hence, n= In (B) / In (A) 3 Given, Cell reference Value A= 1.09 5 B= 2 6 In (A)= LOG(D4,2.71828) 0.086178 7 In (B)= LOG(D5,2.71828) 0.693148 In (B)/In (A) D7/D6 8.043237 8 n=