Chapter 7 Homework Problems 1–11: Please Work Odd Problems

Chapter 7 Homeworkwork Problems 1 11please Work Odd Problems 1357

Chapter 7 Homeworkwork Problems 1 11please Work Odd Problems 1357

Chapter 7 Homework Work Problems 1-11. Please work Odd problems: 1,3,5,7,9,11 Answer to the Even numbers are below. Chapter . The compound annual growth rate is 14.6 percent. 4.

The monthly interest on this loan is 0.417% (5%/12). After the first 12 months with no payments, the balance on the loan will increase to $81,486. To determine the size of the balloon payment at the end of the sixth year, solve for the future value of the loan given the 5 years of monthly car payments of $1,250. The result is a balloon payment at the end of the 6-year loan of $19,568. 6.

The $800 spent to date is sunk; you cannot recoup this money regardless of how the prospective sale works out. You should be willing to spend up to an additional $1,000 if you are confident doing so will land the sale. Here is another way to look at it. Suppose you are certain an additional expenditure of $900 will guarantee the sale. You then have two options: 1. quit trying and lose $800 already spent, or 2. spend the additional $900 for a total expense of $1,700, which net of the $1,000 receipt from the sale results in a loss of $700.

I’d rather lose $700 than $800. 8. Applying the with-without principle, the relevant cash flows for the promotional campaign are as follows: Year Cash flow ($ millions) –$ The annual cash flow with the investment is $1 million, and the annual cash flow without the investment is –$15 million. Taking the difference, $1 million – (–$15 million) = $16 million. In other words, the promotional campaign increases annual cash flows by $16 million.

The chief benefit of this investment is it enables the company to avoid losing its shirt. The PV of the 5-year cash flow of $16 million = $63.9 million. The NPV = –$55 + $63.9 = $8.9 million. Therefore, the campaign is attractive. It prevents a large loss.

The important moral to this problem is that the do-nothing alternative is not always zero. You need to think carefully about the consequences of not making an investment. If the investment avoids a negative outcome, this is a legitimate benefit to the investment. 10. a. Undertake all three investments.

The NPV and the IRR indicate that all of the investments are worthwhile. b. Undertake investment A because it has the highest NPV, and NPV is a direct measure of the increase in wealth from undertaking the investment. c. If the capital budget is fixed at $5.5 million, invest in C and B, and put the remaining $500,000 in A if possible. This is the bundle of investments with the highest total NPV. One can select this bundle by ranking investments by their IRR, or occasionally more accurately by their BCR. =RATE(10,0,-.66,2.58) = 14.6%RATE(nper, pmt, pv, [fv], [type], [guess]) =FV(.05/12,12,0,77520) = ($81,486)FV(rate, nper, pmt, [pv], [type]) =FV(.05/12,60,-1250,81486) = ($19,568)FV(rate, nper, pmt, [pv], [type]) =PV(.08,5,16) = ($63.9) PV(rate, nper, pmt, [fv], [type])

Paper For Above instruction

Chapter 7 encompasses various financial concepts and calculations that are essential for understanding investments, loans, and capital budgeting decisions. The problems outlined provide a comprehensive overview of key financial principles such as compound annual growth rate (CAGR), future value (FV), present value (PV), net present value (NPV), internal rate of return (IRR), and decision-making under uncertainty. This paper elaborates on these concepts with detailed explanations, calculations, and real-world applications to enhance understanding and practical implementation of financial analysis.

1. Compound Annual Growth Rate (CAGR)

The CAGR offers a way to measure the mean annual growth rate of an investment over a specified period, assuming the profits are reinvested at the end of each period. The given CAGR of 14.6% indicates a healthy growth in an investment. The formula for CAGR is:

CAGR = (End Value / Beginning Value)^(1 / Number of Years) - 1

This metric provides investors with an average annual return, smoothing out the volatility over the investment period and facilitating comparisons between different investment opportunities.

2. Loan Amortization and Balloon Payments

The loan scenario illustrates how interest accrues monthly, and how payments reduce the principal over time. With a 0.417% monthly interest rate and a six-year loan term, the calculation of the balloon payment involves determining the future value of the remaining balance after consistent payments. The problem indicates that after 5 years of monthly payments of $1,250, the balloon payment due at year six is approximately $19,568. This highlights the importance of understanding amortization schedules and their impact on long-term debt management.

3. Sunk Costs and Decision-Making

Sunk costs are past expenditures that cannot be recovered and should not influence ongoing decision-making. However, the example discusses the decision to spend additional money to ensure a sale. By comparing the potential additional expenditure to the expected benefit, the analysis concludes a willing expenditure of up to $900, resulting in a net loss of $700 if the sale is guaranteed. Such evaluations exemplify rational decision-making based on marginal analysis and expected outcomes rather than sunk costs.

4. The With-Without Principle in Capital Budgeting

This principle involves comparing the company's cash flows with and without the proposed investment to measure its incremental benefit. The example shows that the promotional campaign increases annual cash flows by $16 million, leading to a present value of $63.9 million. Discounting at an appropriate rate, the net present value (NPV) of the campaign is positive at $8.9 million, indicating its financial attractiveness and risk of large losses if left uninvested.

5. Investment Analysis: NPV and IRR

The analysis of multiple investments demonstrates how NPV and IRR guide capital allocation decisions. Undertaking all projects is justified as they all show positive NPVs and IRRs above the hurdle rate. Prioritization based on highest NPV or IRR helps in optimizing resource allocation when capital is limited. For a fixed budget, combining projects in a way that maximizes total NPV is crucial, often achieved by ranking projects and selecting the highest-value ones within the budget constraints.

6. Applying Financial Formulas

The formulas provided, such as RATE, FV, and PV functions, are instrumental in solving financial problems. For example, calculating the future value of an investment with monthly compounding interest or determining the present value of future cash flows helps in assessing project feasibility, loan payments, and investment returns.

Understanding and applying these principles and formulas ensures sound financial decision-making. They are foundational skills for managers, investors, and financial analysts aiming to optimize wealth, manage risk, and ensure sustainable growth.

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