1. An investment is expected to generate $2,000,000 each year for five years. If

Question

1. An investment is expected to generate $2,000,000 each year for five years. If the firm's cost of funds is 5%, what is the maximum amount the firm should pay for the investments? 2. You put $200,000 in the bank today; if the annual interest rate paid by the bank is 20.5%, and you do not make any withdrawals for 20 years, what will be your balance at that time? 3. You are offered two jobs. One initially pays $100,000 annually and your salary will grow annually at 11.5%. The other pays $97,000 annually, but your salary will grow at 12%. After 10 years, which job pays the higher salary? 4. A firm has 40,000,000 in revenues, 12,500,000 in fixed costs, 10,250,000 in variable costs, and interest of 2,000,000. Compute the DOL, DFL, and DCL. Please show all work.

Explanation / Answer

1) 5 x 2,000000 = P x 1.05^5

so maximum ampount = 7836990.5956

2) 200000 x 1.205^20 = 8332415.88

3) 1st one gives : 100,000 x 1.115^10 = 404555.77

and 2nd one gives : 97,000 x 1.12^10 = 301267.7

hence 1sty one gives more

4) DOL = 40,000,000 - 12,500,000 = 27,500,000

DFL = 40,000,000 - 10,250,000 = 29,750,000

DCL = 40,000,000 - 2,000,000, = 38,000,000

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