Principle of Valuation:Time Value of Money. Final 1

1. Jessica is in the market for a new car. She has narrowed her search down to 2 models. Model A costs $23,000 and Model B costs $17,000. With both cars she plans to pay cash and own them for 3 years before trading in for a new car. Her research indicates that the trade in value for Model A after 3 years is 52% of the initial purchase price, while the trade in value for Model B is 37%. Jessica has no emotional attachment to either model and wants to make a strictly financial decision. The interest rate is 7%. For simplicity assume that operating and maintenance costs for the models are identical every year. Which model is the better decision and how much "cheaper" is it than the alternative?

A. Model A; $1,371.59

B. Model A; $6,000.00

C. Model B; $1,371.59

D. Model B; $6,000.00

Comparison between A&B

A消耗的比B 多,所以选择Model B,选项C

2. College tuition has been rising at a rate of 3% per year. Currently the average tuition of a state college is $8,700 per year. Andrea's son Trevor will begin college in 14 years. Andrea's portfolio is making 7% annually. How much does Andrea need to have set aside today/now to pay for 4 years of college for Trevor? (Note: Tuition will continue to change annually and Andrea's portfolio balance will continue to accrue interest while Trevor is in school. Also, tuition is due at the beginning of each year.)

A. $19,038.11

B. $18,035.07

C. $34,800.00

D. $19,297.52

Calculating Tuition Fee for Each Year Study

选D

3. You have been living in the house you bought 6 years ago for $250,000. At that time, you took out a loan for 80% of the house at a fixed rate 25-year loan at an annual stated rate of 7.0%. You have just paid off the 72th monthly payment. Interest rates have meanwhile dropped steadily to 6.5% per year, and you think it is finally time to refinance the remaining balance over the residual loan life. But there is a catch. The fee to refinance your loan is $5,500. Should you refinance the remaining balance? How much would you save/lose if you decided to refinance?

A. No, lose $1,326.77

B. Yes, gain $6,826.77

C. No, lose $6,826.77

D. Yes, gain $1,326.77

Solutions step by step

So gain 1326.77

4. You are interested in a new Ford Taurus. After visiting your Ford dealer, doing your research on the best leases available, you have three options. (i) Purchase the car for cash and receive a $1,500 cash rebate from Dealer A. The price of the car is $15,000. (ii) Lease the car from Dealer B. Under this option, you pay the dealer $450 now and $175 a month for each of the next 36 months (the first $175 payment occurs 1 month from today). After 36 months you may buy the car for $8,700. (iii) Purchase the car from Dealer C who will lend you the entire purchase price of the car for a zero interest 36-month loan with monthly payments. The car price is $15,000. Suppose the market interest rate is 4%. What is the net cost today of the cheapest option? (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)

对比三个,最便宜的是Dealer A,是13500

Comparison between 3 dealer

5. Diane has just turned 18 and also completed high school. She is wondering about the value of a college education. She is pretty good with numbers, and driven by financial considerations only, so she sits down to calculate whether it is worth the large sum of money involved. She knows that her first year tuition will be $14,000, due at the beginning of the year (that is, right away). Based on historical trends she estimates that tuition will rise at 5% per year for the 4 years she is in school. She also estimates that her living expense above and beyond tuition will be $8,500 per year (assume this extra expense occurs at the end of each year only when she is in college) for the first year and will increase $500 each year thereafter to keep up with inflation. She does not plan to work at all while attending school. Were she to forgo college she would be able to make $27,000 per year out of high school and expects that to grow 3% annually. With the college degree, she estimates that she will earn $42,000 per year out of college, again with annual 3% increases in salary. Either way, she plans to work until the day she turns 63 (she begins college right away). The interest/discount rate is 8%. What is the NPV of her college education? (Note: All cash flows except tuition payments occur at the end of the year.)

A. $444,820.23

B. -$27,227.82

C. -$31,206.31

D. -$29,762.00

Calculating by steps

The conclusion is, its a waste to go to school hahahaha. Choose C.

6. Rafael owned an apartment building that burned down. The empty lot is worth $50,000 and Rafael has received $290,000 from the insurance company. Rafael plans to build another apartment building that will cost $415,000. His real estate adviser estimates that the expected value of the finished building on the real estate market will be $530,000 next year. The discount/interest rate is 7%. What are the NPV and IRR of this decision?

A. -$80,327; -27.71%

B. $30,327; 13.98%

C. -$30,327; -13.98%

D. $80,327; 27.71%

Choose B 

7. Roxanne invested $230,000 in a new business 9 years ago. The business was expected to bring in $2,000 each month for the next 18 years (in excess of all costs). The annual cost of capital (or interest rate) for this type of business was 9% with monthly compounding. What is the value of the business today? (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)

PV(following 9 years)=PV(0.09/12, 108, 2000)=147,678.76

cost=230000

NPV=-82321

why only 9 years? Coz the previous 9 years revenue has been collected while it was not related to the "current" business.

why 230000 still the same, without any interest rate increasing? coz this money has been invested and cannot increase value in the future

8. Fresh off the excitement of the 2012 London Olympic Games, you decide that you want your firm to take advantage of the profits to be made for the 2016 games in Rio de Jeneiro. To do so you plan to open a factory in Brazil. After examining the idea, your CFO projects revenues next year (2013) to be $16 million and costs to be $7 million. Both of these are expected to grow at a rate of 21.0% per year as the excitement for the games builds. Your firm faces a 35% tax rate, a 10.0% discount rate and you can depreciate your new investment using the straight line method over the four years leading up to the games, at which point the value of the venture moving forward will be $5 million. This $5 million is the after-tax terminal value that is in year 4 (that is, 2016) dollars and is the PV of all cash flows year 5 and beyond. The capital expenditure of this project is $11 million. What is the NPV of the project? Assume that you have no significant working capital costs. (You are strongly encouraged to use a spreadsheet.) (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)

calculation steps for Q8

swith million dollars to dollars, the answer would be 20,147,745

9. Walmart is considering opening a small experimental store in New York City. A store is expected to have a long economic life, but the valuation horizon is 19 years. The store in New York is likely to generate revenues of $36M in the first year and then it grows at 5.0%. But the costs of running the business are high because the margins on all the products sold are low. (It is a volume business!) The cost of goods sold is $12M in year 1 and it is expected to grow at 3.5% per year thereafter. Selling and administration costs are likely to be $1.2M every year as it is a small store. The tax rate is 35%. Walmart is so good at managing its stores that working capital increases can be assumed to be negligible. But since New York City is an expensive place, Walmart will have to invest $225M in purchasing a building (with land) even though it is a much smaller property than a usual Walmart store. The good news is that this outlay can be straight line depreciated over 19 years. Also, Walmart has estimated that the after-tax terminal value in year 19 dollars is $75M. This value is the present value of all cash flows in year 20 and beyond. What is the NPV of opening this new store if the appropriate discount rate is 4.0%? (Again, all cash flows except initial investments happen at the end of the year. You are strongly encouraged to use a spreadsheet.) (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)

This time I did this question wrong again, like Assignment 7 Question 9, while since I cannot open the page to try my further analysis any more, I would type in my answer here but won't answer is not confirmed correct. 

10. Springfield Ironworks (SI) recently had their furnace break down and they need to quickly purchase a new one to minimize the disruption in their production. They can either choose a high quality furnace (H) that costs $100,000 with $2,500 of annual maintenance costs for the 6-year life of the furnace, or a low quality furnace (L) that costs $55,000 with $6,500 in annual maintenance costs for the 3-year life of the furnace. Which furnace should SI choose? What is the annualized cost of their choice? Assume a discount rate of 4.5%, and ignore all taxes.

A. L, $72,868

B. H, $21,888

C. H, $112,895

D. L, $26,508

Calculation Steps for Q10

所以选B

最后编辑于
©著作权归作者所有,转载或内容合作请联系作者
  • 序言:七十年代末,一起剥皮案震惊了整个滨河市,随后出现的几起案子,更是在滨河造成了极大的恐慌,老刑警刘岩,带你破解...
    沈念sama阅读 211,376评论 6 491
  • 序言:滨河连续发生了三起死亡事件,死亡现场离奇诡异,居然都是意外死亡,警方通过查阅死者的电脑和手机,发现死者居然都...
    沈念sama阅读 90,126评论 2 385
  • 文/潘晓璐 我一进店门,熙熙楼的掌柜王于贵愁眉苦脸地迎上来,“玉大人,你说我怎么就摊上这事。” “怎么了?”我有些...
    开封第一讲书人阅读 156,966评论 0 347
  • 文/不坏的土叔 我叫张陵,是天一观的道长。 经常有香客问我,道长,这世上最难降的妖魔是什么? 我笑而不...
    开封第一讲书人阅读 56,432评论 1 283
  • 正文 为了忘掉前任,我火速办了婚礼,结果婚礼上,老公的妹妹穿的比我还像新娘。我一直安慰自己,他们只是感情好,可当我...
    茶点故事阅读 65,519评论 6 385
  • 文/花漫 我一把揭开白布。 她就那样静静地躺着,像睡着了一般。 火红的嫁衣衬着肌肤如雪。 梳的纹丝不乱的头发上,一...
    开封第一讲书人阅读 49,792评论 1 290
  • 那天,我揣着相机与录音,去河边找鬼。 笑死,一个胖子当着我的面吹牛,可吹牛的内容都是我干的。 我是一名探鬼主播,决...
    沈念sama阅读 38,933评论 3 406
  • 文/苍兰香墨 我猛地睁开眼,长吁一口气:“原来是场噩梦啊……” “哼!你这毒妇竟也来了?” 一声冷哼从身侧响起,我...
    开封第一讲书人阅读 37,701评论 0 266
  • 序言:老挝万荣一对情侣失踪,失踪者是张志新(化名)和其女友刘颖,没想到半个月后,有当地人在树林里发现了一具尸体,经...
    沈念sama阅读 44,143评论 1 303
  • 正文 独居荒郊野岭守林人离奇死亡,尸身上长有42处带血的脓包…… 初始之章·张勋 以下内容为张勋视角 年9月15日...
    茶点故事阅读 36,488评论 2 327
  • 正文 我和宋清朗相恋三年,在试婚纱的时候发现自己被绿了。 大学时的朋友给我发了我未婚夫和他白月光在一起吃饭的照片。...
    茶点故事阅读 38,626评论 1 340
  • 序言:一个原本活蹦乱跳的男人离奇死亡,死状恐怖,灵堂内的尸体忽然破棺而出,到底是诈尸还是另有隐情,我是刑警宁泽,带...
    沈念sama阅读 34,292评论 4 329
  • 正文 年R本政府宣布,位于F岛的核电站,受9级特大地震影响,放射性物质发生泄漏。R本人自食恶果不足惜,却给世界环境...
    茶点故事阅读 39,896评论 3 313
  • 文/蒙蒙 一、第九天 我趴在偏房一处隐蔽的房顶上张望。 院中可真热闹,春花似锦、人声如沸。这庄子的主人今日做“春日...
    开封第一讲书人阅读 30,742评论 0 21
  • 文/苍兰香墨 我抬头看了看天上的太阳。三九已至,却和暖如春,着一层夹袄步出监牢的瞬间,已是汗流浃背。 一阵脚步声响...
    开封第一讲书人阅读 31,977评论 1 265
  • 我被黑心中介骗来泰国打工, 没想到刚下飞机就差点儿被人妖公主榨干…… 1. 我叫王不留,地道东北人。 一个月前我还...
    沈念sama阅读 46,324评论 2 360
  • 正文 我出身青楼,却偏偏与公主长得像,于是被迫代替她去往敌国和亲。 传闻我的和亲对象是个残疾皇子,可洞房花烛夜当晚...
    茶点故事阅读 43,494评论 2 348

推荐阅读更多精彩内容

  • **2014真题Directions:Read the following text. Choose the be...
    又是夜半惊坐起阅读 9,435评论 0 23
  • 安心, 就是没有胡思乱想; 安静, 就是没有胡作非为; 沉默, 就是没有胡说八道! 安好, 是人生的吉祥。 不安,...
    再凑热闹阅读 134评论 0 0
  • 感恩儿子的独立,今早自己一个人去外面吃好了早餐,愿他成长为善良与智慧并存的小伙子 感恩伙伴们每日精彩的分享,看到他...
    邬静阅读 130评论 0 4
  • 现在越来越多的大学生,越来越多的专业方向,越来越多的高校。填报志愿的时候脑袋进的水,就是出来找实习工作时流的泪。 ...
    呼尔将出换美酒阅读 326评论 2 2
  • 伴随着网络文学的发展,以及相关产业链越趋成熟,人们纷纷参与到网络文学这个行业当中,并衍生出产业链。 在小编看来,网...
    成功的秘诀阅读 2,942评论 0 0