Answer all questions on a Microsoft Word Document or PDF file.  Please be sure to number each answer and include your name in the file.

Question 1:
If you invest $200 in a bank at 4% interest for 5 years, how much will you have at the end of five years?

Question 2:
In relation to Question 1, if instead of investing a single $200, you instead invest $200 for each of the next 5 years (you deposit $1,000 total), how much will you have at the end of 5 years.  Remember, you are earning 4% interest.

Question 3:
You grandmother has promised to give you $30,000 in 10 years.  You figure that you can earn 10% a year (In other words, r=10%).  What is the $30,000 worth to you in today’s dollars?

Question 4:
In relation to Question 3, instead of giving you $30,000 in 10 years, your grandmother agrees to give you $3,000 for each of the next 10 years.  What is this worth in today’s dollars?  r=10%

Question 5:
You make $300 dollars selling your old comic books to four guys who work at a University.  You put $100 in the bank at 3% interest, and keep the other $200 under your mattress, and never use it.  How much money, in total, will you have one year later?

Question 6:
Charles Wagon (his friends call him Chuck), is a first round draft choice of the Cleveland Browns.  You are Chuck’s agent.  The Browns are proposing two deals:

- Offer 1: $4 million a year for the next 5 years.
- Offer 2: $8 million now and $2 million a year for 5 years.

The interest rate is 10%.

Which is the better deal?  Show the numbers.
(Hint: Bring everything back to today’s dollars.)

Question 7:
Briefly describe, in your own words, what Capital Budgeting is.

Question 8:
Briefly describe, in your own words, the disadvantages of the Payback Method in Capital Budgeting.

Question 9:
What is the rule regarding Net Present Value? When should a project be accepted using this rule?

Question 10:
A Broadway show will cost $17,000,000 to put on and will require that the entire investment be spent up front.  The show is then expected to bring in $5,000,000 a year for four years.

The investors estimate that they can earn 7% a year on their money if it is not invested in this show.  Calculate the Net Present Value of investing in this show and state whether or note the investors should or should not make this investment and why.

Please see the Net Present Value Calculators in the Resources section in the instructions download.
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1 Answer

You have a lot of questions. I hope this helps and that I have interpreted your questions correctly. Please note that I am not familiar with business economics. My answers are based on the math and a small amount of research, so they may not be correct.

Simple interest is I=PTR/100 where P is the principal amount, R the annual percentage rate and T the time in years. The amount A after T years is P+I=P(1+TR/100).

1. Amount after 5 years=200(1+5*4/100)=200*1.2=$240. In other words, 200+40 dollars.

2. For each separate investment of $200 you get $8 each year in interest (because 200*1*4/100=8) so that at the end of the year you have $208. So in 5 years when you add together all your investments you end up with 5*208=$1040. In other words, you invested $1000 altogether, and you got $8 interest for each year, making the total interest 5*8=$40. 1000+40=$1040.

3. I interpret this as saying that a principal amount P will amount to $30000 in 10 years' time. R=10% and T=10, so A=P+I=30000=P(1+10*10/100)=2P so 2P=$30000 and P=$15000. In today's money $15000 will grow to $30000 in 10 years.

4. If $3000 is invested for a year, I=3000*10/100=$300. In the first year, $3000 grows to 3000+300=$3300. If this amount is not re-invested, in the second year $3000 will also grow to $3300, and so on. In 10 years the total amount will be 3300*10=$33000. [The answer is different and more complicated if in the second year, $3300 (earned from the first year) is invested together with another $3000, making $6300 as the second year's investment. Another 10% interest is now earned on $6300, making 6300+630=$6930 to be added to another $3000 making $9930 as the amount invested for the third year. And so on. Quite complicated!]

5. The facts about how the $300 is obtained are not relevant. The only important fact is that you started with $300, and invested $100 at 3%, earning I=100*1*3/100=$3. The amount after 1 year from the invested money is 100+3=$103. Add this to the hidden $200 to make $303.

6. Offer 1: $4000000 makes 4000000*10/100=$400000 interest and the total amount becomes $4400000. This happens every year for 5 years, so 5*4400000=$22000000 or $22 million.

Offer 2: $2000000 a year raises $200000 in interest making $2200000 each year for 5 years=$11 million. We add that to the lump sum of $8 million making $19 million. So offer 1 is better.

7. A company's planning process to decide on the best investments to make.

8. Payback Method ignores what real value the money returned has at the time it is returned. It is disadvantageous to opt for a longer rather than a shorter period when planning investments.

9. NPV rule: reject investment if NPV negative; accept if positive.

10. Initially there is no cash inflow because the show has not yet run. The current assets are zero, NPV=0. But since this is not negative, the investment should be accepted. The expected returns are $20M plus annual interest=5000000*7/100=$350000 per year for four years=$1400000. Total expected amount after 4 years is 20000000+1400000=$21400000 which exceeds the initial cost of production. The investment would appear to be justified.

I hope I've been of some help.

by Top Rated User (628k points)

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