Question 5 Your firm purchases a piece of property by buying it outright for $51

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  Question 5

Your firm purchases a piece of property by buying it outright for $515,000. Historically, nearby property in the neighborhood has appreciated in value about 4% per year. Assuming you can rely on this historic appreciation what will the property be worth AT THE END OF 20 YEARS?

  Question 6

In doing some retirement planning you determined that you want to save $25,000 each year until you retire. You plan to invest it in a 'guaranteed return mutual fund' which pays COMPOUND interest at 4% per year; you plan to keep it invested there until you retire in 30 years. WHAT WILL THE INVESTMENT BE WORTH THEN?

  Question 7

Your firm must replace its packaging machine after its useful life of 10 years passes and depreciation can no longer be claimed on it. The estimated replacement cost is $5,550,123. How much must the company save (invest) each year at 2% to accumulate enough to replace the machine?

  Question 8

You are offered two investments for the firm’s “retained earnings” ($4,238,000). As CFO you are looking for good ways to invest the firm’s hard earned money.   Which option will give you a better return on and of investment (two ROIs)?

Option 1 – pays out at 4% simple interest for five years

Option 2 – pays out at 2% compound interest for four years

  Question 9

Increasing the number of periods could impact all of the following except

A – PV of an annuity

B – PV of $1

C – FV of $1

D – FV of an annuity

  Question 5

Your firm purchases a piece of property by buying it outright for $515,000. Historically, nearby property in the neighborhood has appreciated in value about 4% per year. Assuming you can rely on this historic appreciation what will the property be worth AT THE END OF 20 YEARS?

Explanation / Answer

QS . 5

Using formula,

Future value = P*(1+r)t = $515,000*(1+0.04)20 = $1,128,428.419

So the property will be worth of $1,128,428.419 after 20 years.

QS 6.

Now using Annuity formula,

Future Value = C* [ (1+i)n - 1/ i ]

C = Cash flow per period

i = interest rate

n = number of payments

So after 30 years the investment will be worth of,

Future Value = $25,000 * [ (1+0.04)30 - 1 / 0.04 ] = $1,402,123.44

QS.7

As the firm is investing money each year by the same amount so it is an example of Annuity.

Now from the question we can see after 10 years they need $5,550,123 so this is the future value and interest rate is 0.02 and time period is 10 years

Future Value = C* [ (1+i)n - 1/ i ]

And we need value of C so,

C = Future value / [ (1+i)n - 1/ i ]

C= $5,550,123 / [ (1+0.02)10 - 1 / 0.02 = $506,873.46

QS8.

For this let us calculate the future value for both options:

Option A:

Interest = prt = $4,238,000*0.04*5 = $847,600

So total/future value after 5 years = $4,238,000 + $847,600 =$ 5,085,600

            Option B:

Future Value = P(1+r)t = $4,238,000 * (1+0.02)4 = $4,587,347.49

As the future value for Option A is higher so it is giving better return.

QS 9 .

B - PV of $1

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