You have $6,000 in cash in a savings account and are considering investing $21,0
ID: 2790292 • Letter: Y
Question
You have $6,000 in cash in a savings account and are considering investing $21,000 in a friends’ new business venture. Since you do not have enough cash for the investment, you get a credit-line with a maximum credit of $50,000 which charges 2% interest a month on the outstanding balance in order to be able to borrow some money in case you go ahead. Fortunately you have a reasonably good job and earn $2,700 a month which leaves you with a cash surplus of $1,000 a month that you can use for savings or investments (if you borrow money you’ll need to pay the interest out of this $1,000). Note: salaries are paid at the end of the month and it is now the beginning of the month.
3) Considering the situation on the previous slide:
i. If you decide to forego the investment opportunity and save your cash and income surplus in a super-savings account that pays 0.35% interest a month, how much money will you have one year from now?
ii. If you invest in your friends’ company borrow as little money as possible and use any cash surpluses you might have to pay off the credit line, how much debts do you still have one year from now?
iii. If you invest in your friends’ company but decide not to use the cash surpluses for reducing the loan (of course you still have to pay interest …), borrow as much as you can and put all the cash you not invested into your friend’s business in the stock-market (which is expected to return 1% a month), what is the sum of the outstanding credit-line debt and the publicly traded shares you own one year from now?
You can use excel to solve this. Please show/explain your work.
Explanation / Answer
Answer for question no.i.3:
Cash in savings account=$6,000.------(1)
Amount deposited in to savings account=$1,000.------------(2)
Interest rate per month=0.35%.
Amount after one year is nothing but the future value of (1) and (2)
This can be calculated by using FV function, i.e, FV(rate,nper,pmt,[PV],[type])
Future value of 1 is FV(0.35%,12,,-6000,1)
=$6,256.91.-------------(3)
Future value of monthly deposit of $1,000 =FV(0.35%,12,-1000,,0)
=$12,233.72-------(4)
Therefore, money after one year=(3)+(4)
=$18,490.62.
Answer for question no.ii:
Amount required to invest in friends company=$21,000
Amount available=$6,000.
Amount to be borrowed=$21,000-$6,000
=$15,000.=PV
Interest on loan=2%,=rate
Savings every month that are used to repay the debt=$1,000.=pmt
Number of months=12=nper
Subtituting the values in the FVformula =FV(.02%,12,-1000,15000,0)
=$5,611.54.
Answer for question no.iii:
Borrowed=$15,000
Surplus per month=$1,000
Interest on debt=$15,000*2%=$300.
Balance amount in the credit line=$50,000-$15,000=$35,000.is invested in stock.
Return earned on this investment=1%.
Credit line at the end of the year=FV(2%,12,,-50000,1)
=$63,412.09.
Return expected on the stock=fv(1%,12,,35000,0)
=$39,438.88
Sum of the credit line and return=$39,438.88-$63,412.09
=$23,973.21.
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