Question

1. Kramerica Industries, Inc. wants to invest $140,000 of extra money received from overseas sales of its old assets. How much money will it have at the end of 10 years if the investment fund it chooses guarantees the yearly return rate of 20% compounded annually?
   
   
   
   
   
2. Vandalay Industries, Inc. anticipates big growth in business and has to start planning its future expansion. The company will need $220,000 in 8 years to purchase space for the new factory in another state. How much must the firm invest today in order to have the necessary funds for the expansion project in 8 years if its bank money market account pays the annual interest rate of 7% compounded annually?
   
   
   
   
   
3. Kramer is thinking about a promising investment in fat-free yogurt store chain. Credible food industry stock analysts project that the company’s dividend next year will be $1.8 per share, which is projected to increase by 7% every year and is expected to do so indefinitely. Based on the dividend growth model, compute the value of the company’s stock in eight years if investors require 12% annual return rate on similar food chain stores.
   
   
   
   
4. Mr. Newman wants to start the business of collecting and reselling empty bottles and cans. His initial startup costs are $80,000. He thinks that the business is going to generate the cash revenue of $25,000 per year during next five years. Should this business project be initiated given that potential investors require 16% annual rate of return on the projects like this?

Answer 1

Q1.

P = 140000, i = 20%, t = 10 years

Using formula F = P * (1+i)^t

F = 140000 (1+0.2)^10

F = 866843.099

Q2

F = 220000, t = 8, i = 7%

Using the same formula given above

P = 220000 / (1+0.07)^8

P = 128042.003

Q3

current value of the stock = 1.8/(0.12 - 0.07) = 36

value of the stock in 8 years = 36*(1 + 0.07)^8 = 61.855

Q4

P = 80000, Annual revenue = 25000, t = 5 yrs, i = 16%

Present value = -80000 + 25000/1.16 + 25000/1.16² + 25000/1.16³+ 25000/1.16⁴+ 25000/1.16⁵

= -80000 + 21551.724 + 18579.072 + 16016.441 + 13807.277 + 11902.825

= 1857.34

Investment should be made as NPV is positive