Please help me :( You have inherited $150,000 from your grand-mother. You have d
ID: 2548358 • Letter: P
Question
Please help me :(
You have inherited $150,000 from your grand-mother. You have determined that you have two different investment opportunities available to you. The money can be placed on deposit at the Bank and the interest rate you can earn is 8% compounded annually. You can invest in a business opportunity with Suni's Surfboards and receive the following cash flows: Year 1 Year 2-4 Year 5 $15,000 $30,000 each year $100,000 Please use the Present Value tables in the course book. Required: a) Calculate the present value of the investment at the Bank and the business opportunity with Suni's surfboards. Use 8% per annum as the discount rate. (6 marks) b) Which investment, do you think, represents the best opportunity? Why? (2 mark) c) State two other factors you would consider before making your final decision. (50 words maximum) (2 mark) d) Explain why you cannot simply look at the total cash returns when comparing the two investment opportunities. (100 words maximum) (3 marks)Explanation / Answer
a) Present Value of investment at bank=$150000
Present value of cash flows at suni's surfboards
1. 15000* 0.9259259
2. 30000*0.857338820
3. 30000*0.793832241
4. 30000*0.73502985277
5. 100000*0.680583197
Present Value: $153533
b) By comparing the cash flows it can be seens that present values of business opportunity are more than the bank. Hence suni's surfboards business opportunity is more lucrative and represents best business opportunity.
c) Risk return parity
Alternative options available
Tenure of investment
Status (financial position of Suni's surfboards)
d) Only by looking at the cash flows, one cannot make decision for investment. Investment decision is based on other factors also like;
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