Question

4-You decide to save for your dream vacation to Europe (London, Paris, and Rome). You want to be able to travel in 5 years. If you believe your trip will cost $8,000 and you can earn 6 percent annual interest on your savings, how much must you deposit today so you can afford your trip in 5 years?

5-What is the effective annual rate (EAR) of an 8 percent annual stated rate that is compunded semi-annually?

6-Burns Industries has total sales of $300,000 and costs of $105,000 (Note: costs do not include depreciation expense). Depreciation expense is $25,000 and the tax rate is 35 percent. The firm does not have any interest expense. What is the operating cash flow (OCF)?  

Answer 1

4)

Present value = future value / ( 1 + r)ⁿ

Present value = 8,000 / ( 1 + 0.06)⁵

Present value = $5,978.0654

5)

Effective annual rate = ( 1 + r/n)ⁿ - 1

Effective annual rate = ( 1 + 0.08/2)² - 1

Effective annual rate = ( 1 + 0.04)² - 1

Effective annual rate = 1.0816 - 1

Effective annual rate = 0.816 or 8.16%

6)

Operating cash flow = ( sales - costs - depreciation)( 1 - tax) + depreciation

Operating cash flow = ( 300,000 - 105,000 - 25,000)( 1 - 0.35) + 25,000

Operating cash flow = 170,000 ( 0.65) + 25,000

Operating cash flow = $135,500