Activity Time Value Of Money And Discounted Cash Flow Analys

Activity Time Value Of Money And Discounted Cash Flow Analysis Practi

Activity: Time Value of Money and Discounted Cash Flow Analysis Practice Complete the following and submit in a Word document. Be sure to show your process and calculations: As a financial analyst, you have been brought in to help various organizations or individuals to make decisions on possible financial investments that have been presented to them. Solve each of these problems using standard discounted cash flow analysis techniques. Living Color Co. is facing a decision on a pending project with the following cash flows. If the required return for the project is 9.9 percent, what is the project's NPV? Should Living Color move forward with the project? Show all calculations to arrive at the NPV. Kathy Flemings is planning on buying a new car in seven years. She thinks that she will need about $25,000. She has decided to invest $2,500 today and will do so at the beginning of each of the next six years for a total of seven payments. If her investment can earn 12 percent annually, how much will she have at the end of seven years? Will this be enough for her new car? Show all calculations to arrive at this answer. Foodelicious Corp. is evaluating whether it should purchase an ethnic restaurant in Manhattan. The current owner had originally signed a 25-year lease, of which 16 years still remain. Foodelicious Corp. expects the restaurant to continue to have sales (and net cash flows) of about the same for the remainder of the lease. Last year, the restaurant brought in net cash flows of $310,000. The current owner is asking $1,950,000 for the business. If Foodelicious evaluates similar investments using a 15 percent discount rate, what is the present value of this investment? Should it take over the investment? Show all calculations to help Foodelicious make a decision. Mary Lynn Sirianni believes that she will need $750,000 in an IRA investment to live a comfortable life when she retires in 30 years. She is offered an IRA investment that will require her to invest $3,000 a year for the next 30 years, starting at the end of this year. The investment will earn 13 percent annually. How much will she have at the end of 30 years? Should she make this investment? Show all calculations to help her make a decision. Gretchen Williams won a lottery. She will have a choice of receiving either $25,000 at the end of each year for the next 30 years or take a lump sum payment today of $215,000. If she can earn a return of 10 percent on any investment she makes, which option should she take? Show all calculations to help her make a decision.

Paper For Above instruction

In this comprehensive analysis, we evaluate multiple financial scenarios using the principles of time value of money (TVM) and discounted cash flow (DCF) to assist different individuals and organizations in making sound investment decisions. Each case emphasizes applying core financial formulas, including net present value (NPV), future value (FV), and present value of an annuity, considering given interest rates and time horizons.

1. NPV Calculation for Living Color Co. Project

Living Color Co. faces a new project with expected cash flows detailed in the problem statement. To determine if the project should proceed, we calculate the project's net present value (NPV). Assume the cash flows are provided as an array or timeline, which includes initial investments and subsequent incoming cash flows. For illustrative purposes, let's posit future cash flows over a specific period (e.g., Year 1 to Year n). The NPV formula is:

NPV = ∑ (Cash Flow_t / (1 + r)^t) – Initial Investment

Where r = 9.9% (0.099), and t = year number.

For example, if the project yields cash flows of $X over certain years, plugging in these values gives the NPV. A positive NPV indicates the project adds value and should be considered; a negative NPV suggests rejection.

2. Future Value of a Series of Payments for Kathy Flemings

Kathy plans to invest $2,500 at the beginning of each year for 7 years in an account earning 12% annually. Since the payments are made at the beginning of each period, this is an annuity due. The future value (FV) can be calculated using the future value of an annuity due formula:

FV = P × [( (1 + r)^n – 1 ) / r ] × (1 + r)

Where:

- P = $2,500,

- r = 12% (0.12),

- n = 7 years.

Plugging in the values:

FV = 2,500 × [((1 + 0.12)^7 – 1) / 0.12] × (1 + 0.12)

Calculating step by step:

- (1 + 0.12)^7 = 2.2107

- Subtract 1: 1.2107

- Divide by 0.12: 10.089

- Multiply by P: 2,500 × 10.089 = 25,222.50

- Multiply by (1 + 0.12): 25,222.50 × 1.12 = approximately $28,258.80

This accumulated amount is sufficient to meet her goal of $25,000, indicating her investment plan will likely fund her purchase.

3. Present Value of a Business Investment for Foodelicious Corp.

Foodelicious considers purchasing a restaurant with a current annual net cash flow of $310,000, remaining lease of 16 years, and asking price of $1,950,000. We calculate the present value (PV) of future cash flows:

PV = Cash Flow × Annuity Factor

Using the discount rate of 15%, the present value of a 16-year annuity can be found from standard tables or calculations:

PV = 310,000 × [(1 – (1 + r)^-n) / r]

Substituting:

PV = 310,000 × [(1 – (1 + 0.15)^-16) / 0.15]

Calculations:

- (1 + 0.15)^-16 ≈ 0.1297

- 1 – 0.1297 = 0.8703

- 0.8703 / 0.15 ≈ 5.802

- Multiply by annual cash flow: 310,000 × 5.802 ≈ $1,798,620

Since the asking price ($1,950,000) exceeds the present value ($1,798,620), the investment appears overvalued based on this analysis, and Foodelicious should consider negotiating or rejecting the purchase.

4. Retirement Savings Calculation for Mary Lynn Sirianni

Mary Lynn plans to invest $3,000 yearly at 13% for 30 years. The future value of an ordinary annuity is:

FV = P × [((1 + r)^n – 1) / r]

Plugging in:

FV = 3,000 × [((1 + 0.13)^30 – 1) / 0.13]

Calculate:

- (1 + 0.13)^30 ≈ 30.996

- Subtract 1: 29.996

- Divide by 0.13: approximately 230.737

- Multiply by P: 3,000 × 230.737 ≈ $692,211

This amount almost doubles her desired $750,000, indicating that she should proceed with the investments, possibly adjusting contributions or interest assumptions for further accuracy.

5. Lottery Return Options for Gretchen Williams

Gretchen faces a choice: annual payments of $25,000 for 30 years or a lump sum of $215,000. To compare, we calculate the present value of the annuity using a discount rate of 10%:

PV = P × [(1 – (1 + r)^-n) / r]

PV = 25,000 × [(1 – (1 + 0.10)^-30) / 0.10]

Calculations:

- (1 + 0.10)^-30 ≈ 0.0573

- 1 – 0.0573 = 0.9427

- 0.9427 / 0.10 = 9.427

- PV = 25,000 × 9.427 ≈ $235,675

Since the PV of the annuity ($235,675) exceeds the lump sum ($215,000), Gretchen should opt for the annuity payments.

Conclusion

Each financial decision relies heavily on core TVM principles. The NPV calculation indicates whether a project adds value. The FV and PV calculations guide investment and purchasing decisions. Annuity formulas assist in retirement planning, and the comparison of lump sums versus annuities highlights timing and rate-of-return considerations. Overall, strictly quantitative analysis supports informed decision-making for individuals and corporations.

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