Financial Analysis

[Name of the Institute]

Question 1

Answer.

(a,b,c)

Compounded

Future Value

3000 6000 6000 10000 8000 7000

Year0 1 2 3 4 5 6

Present Value

Discounted

Answer D.

The financial manager will follow the approach of future value because the initial outflow is 25000 which is paid back or returned at the end of year 4 and remaining in year 5 and 6 is the profit however the present value is not suitable now because the present value will (Gitman.2000) l be the loss on the investment. Financial Manager if focus on the future value than 4 the six years he will earn, and 15000 as the return of investment as profit in the end of sixth year. (p.198)

Question 2

Answer.

Case

Single Cash flows

Interest rate

Deposit Period

Cash Flows

A

$200

5%

20

5306.59541

B

$4,500

8%

7

2625.706779

C

$10,000

9%

10

4224.108069

D

$25,000

10%

12

7965.770443

E

$37,000

11%

5

62347.15174

F

$40,000

12%

9

110923.1503

Formula.

PV= FV/(1+i)^n

FV=PV/(1+i)^n

Question 3

Answer

P5-11Present values

For each of the cases shown in the following table, calculate the present value of the cash flow, discounting at the rate given and assuming that the cash flow is received at the end of the period noted.

Case

Single cash flow

Discount rate

End of period(years)

Cash Flows

A

$7,000

12%

4

4448.626549

B

$28,000

8%

20

6007.349807

C

$10,000

14%

12

2075.591024

D

$150,000

11%

6

80196.12541

E

$45,000

20%

8

10465.56177

Question 4

Answer

P5-17 Cash flow investment decision

Tom Alexander has an opportunity to purchase any of the investments shown in the following table. The purchase price, the amount of the single cash inflow, and its year of receipt are given for each investment. Which purchase recommendations would you make, assuming that Tom can earn 10% on his investments?

Investment

Price

Single cash inflow

Year of receipt

A

$18,000

$30,000

5

B

$600

$3,000

20

C

$3,500

$10,000

10

D

$1,000

$15,000

40

Using Formula

Investment*(1+i)^n

A=28989.18

B=4036.49997

C=9078.09861

D=45259.25557

Question 5

Answer

P.20

Case

Amount of annuity

Interest rate

Period(years)

A

$12,000

7%

3

B

$55,000

12%

15

C

$700

20%

9

D

$140,000

5%

7

E

$22,500

10%

5

A.

P = PMT [(1 - (1 / (1 + r)n)) / r]

A

11988.3386

B

54998.78202

C

697.8465922

D

139985.7864

E

22493.79079

Present Value of Ordinary Annuity

Case

Amount of annuity

Interest rate

Period(years)

A

$12,000

7%

3

B

$55,000

12%

15

C

$700

20%

9

D

$140,000

5%

7

E

$22,500

10%

5

1/(1+i)^n

Years

Amount of Annuity

Interest Rate

Period

A

12000

7%

3

0.816298

9795.575

B

55000

12%

15

0.182696

10048.29

C

700

20%

9

0.193807

135.6647

D

140000

5%

7

0.62275

87184.96

E

22500

10%

5

0.620921

13970.73

Total =

121135.2

Perpetuity

Annual amount

Discount rate

A

$20,000

8%

B

$100,000

10%

C

$3,000

6%

D

$60,000

5%

B. Ordinary annuity is more appropriate because the ordinary annuity due always consists of an extra factor of interest with it(Amihud,1988) while the ...