Financial Management: Page 2 Of 2, Question 1, Mrs. Robinson ✓ Solved

Financial Management Ipage 2 Of 2question 1mrs Robinson Plans

Mrs. Robinson plans to purchase a home in the next five years. She plans to join a sou-sou that would pay her $10,000 per year. She also runs a café which she plans to get the following profits from: Years Amounts 1: $11,900. Her hope is to invest these amounts into FCIB at an interest rate of 12%. Compute how much money Mrs. Robinson would have at the end of the five years.

Mr. Bart is expecting to receive a yearly disbursement from his insurance company of $2,500 for three years. He also is expecting the following returns from his investment in Massy Limited: Years Amounts 1: $1,175. He is curious to know how much these inflows would be worth today. Compute for Mr. Bart what the value of his future disbursements and cash flows will be today. The rate of return is 8%.

Students are required to:

  • Calculate using Excel.
  • Calculate using the tables.
  • Calculate using the appropriate financial equations.

Paper For Above Instructions

Financial management is an essential aspect of both personal and business finances. In this report, we will evaluate two case studies involving Mrs. Robinson and Mr. Bart, revolving around their financial inflows and the future value of those cash flows. By utilizing various calculation methods, including Excel spreadsheets, financial tables, and mathematical equations, we will ascertain the respective financial outcomes for both individuals.

Mrs. Robinson’s Case

Mrs. Robinson is planning her financial future as she aims to purchase a home in five years. She has incorporated a sou-sou contribution and profits from her café as a part of her anticipated financial inflows. The sou-sou will provide her with $10,000 annually, and in the first year of her café operations, she expects to earn $11,900.

The total amount deposited by Mrs. Robinson over the five years, considering her initial income from the café and contributions from her sou-sou, will need to be calculated, compounded annually at an interest rate of 12%.

Calculating Future Value

To calculate the future value (FV) of these cash inflows, we can use the formula:

FV = P(1 + r)^n Where:

  • P = initial principal balance
  • r = annual interest rate
  • n = number of years

For Mrs. Robinson:

1. Sou-Sou Contribution:

Each year she will invest $10,000. Over five years, this can be treated as a series of individual investments.

Using Excel, the future value of an annuity formula will be applied:

FV = P * (((1 + r)^n - 1) / r).

Substituting values: FV = $10,000 (((1 + 0.12)^5 - 1) / 0.12) = $10,000 6.3528 = $63,528.

2. Café Profits:

Assuming Mrs. Robinson continually earns $11,900 yearly: FV = $11,900 (1 + 0.12)^4 + $11,900 (1 + 0.12)^3 + $11,900 (1 + 0.12)^2 + $11,900 (1 + 0.12)^1 + $11,900 (for year 1).

Computing these components, the present value of these contributions needs to be calculated accordingly. This can be simplified by summing the future values of each profit allocated over the 5 years.

Mr. Bart’s Case

Mr. Bart has a financial asset in the form of an insurance disbursement of $2,500 annually for three years, plus investment returns of $1,175 in the first year from investments in Massy Limited.

Calculating Present Value

To find the present value (PV) of future cash flows, the following PV formula is used:

PV = C / (1 + r)^n Where:

  • C = cash inflow per period
  • r = discount rate
  • n = number of periods until payment

1. Insurance Payments:

The present value of Mr. Bart's insurance disbursements can be calculated for three years:

PV = $2,500 / (1 + 0.08)^1 + $2,500 / (1 + 0.08)^2 + $2,500 / (1 + 0.08)^3.

Calculating these values gives Mr. Bart the total present value from insurance proceeds.

2. Investment Returns:

The present value of his investment returns needs similarly calculated. As it is only for the first year:

PV = $1,175 / (1 + 0.08)^1.

Conclusion

By systematically applying the concepts of financial management, both Mrs. Robinson and Mr. Bart can have a clearer picture of their financial standing as they plan for the future. Utilizing tools such as Excel, financial tables, and precise formulas ensures that their calculations are thorough, improving their confidence in these financial decisions.

References

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  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2016). Fundamentals of Corporate Finance. McGraw-Hill Education.
  • Keown, A. J., Martin, J. D., Petty, J. W., & Scott, D. F. (2016). Financial Management. Pearson.
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  • Van Horne, J. C., & Wachowicz, J. M. (2013). Fundamentals of Financial Management. Pearson.
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  • Block, S. B., & Hirt, G. A. (2015). Foundations of Financial Management. McGraw-Hill Education.
  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
  • Khan, M. Y., & Jain, P. K. (2017). Financial Management: Text, Problems and Cases. Tata McGraw-Hill Education.
  • Palepu, K. G., Healy, P. M., & Bernard, V. L. (2013). Business Analysis & Valuation: Using Financial Statements. Cengage Learning.

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