Exercise (Working Capital) Consider that some other young person that you know i

Question

Exercise (Working Capital)

Consider that some other young person that you know is out of money in their checking account. However, a local convenience store [that sells a lot of beer to students and others] will cash a check for “your” young person for a maximum amount of $200. Thus, your “young” person cashes a check for $200. Of course, the check will bounce unless that “young” person” does something. To prevent this, the “young” person goes to the convenience store the next day and cashes another check for $200. That “young” person takes this $200 and deposits it in their bank account. That “young” person repeats the process every day and in doing so, ensures that no checks bounce. Eventually, that “young” person receives manna from heaven in the form of money and is able to cover all his/her outstanding checks.

To make it interesting, suppose that no checks have bounced along the way. Assuming that this is true and ignoring any question of legality (what we have described is probably illegal check kiting), is there anything unethical about this? If your answer is yes, explain why. In particular, who is harmed?

Exercise -B (Time Value of Money)

Which would you prefer $10,000 today or $10,000 in three years? Explain your answer.

Exercise -C (Present Value)

Remember, a future value is the compounded value of a present value.

Athens Electrical Supply is considering investing in a certain project having the following cash flows

Year

Cash Flow

1

$870

2

1020

3

1240

4

1960

. What is the future value of these cash flows in year 4 at an: A.             Interest rate of 9 percent

B.        Interest rate of 15 percent?

Year

Cash Flow

1

$870

2

1020

3

1240

4

1960

Explanation / Answer

a) First Part is from other subject.

b)would prefer to invest 10000 $ in 3rd year irrespective of 1st year due to time value of Money. for exp if i invested 1 $ by today then its value would be 1$ and if i invested 1$ in 3rd year then today its value wouild be less than 1$. hence i would like to invest in 3rd year.

c) FV=

870(1.09)(1.09)(1.09)(1.09)+1020(1.09)(1.09)(1.09)+1240(1.09)(1.09)+1960(1.09)

=6158.65

if interest rate is 15%

870(1.15)(1.15)(1.15)(1.15)+1020(1.15)(1.15)(1.15)+1240(1.15)(1.15)+1960(1.15)

=6966.83

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