SHORT ANSWER QUESTIONS: 1) Your friend is celebrating his 35th birthday today and wants to start saving for his anticipated retirement at age 65. He wants to be able to withdraw $10,000 from his savings account on each birthday for 10 years following his retirement; the first withdrawal will be on his 66th birthday. Your …
There are 4 main types of annuities: Ordinary annuities An ordinary annuity is a series of constant cash flows that occur at the end of each period for some fixed number of periods commencing at the end of the first period ie t=1Examples include consumer loans and home mortgages. Annuities due An annuity due is …
Assume you make a deposit into a bank account A) If the Bank pays you simple interest the interest payment each year will be the same and will be the interest rate times the initial amount. Eg. I put $100 in my bank and the bank pays me 10% p.a., I will get $10 (10% …
1. Assume Evco, Inc., has a current price of $50 and will pay a $2 dividend in one year, and its equity cost of capital is 15%. What price must you expect it to sell for right after paying the dividend in one year in order to justify its current price? 2. Anle Corporation has …
1) A 30-year bond with a face value of $1000 has a coupon rate of 5.5%, with semiannual payments. a. What is the coupon payment for this bond?b. What is the price of the bond?2) Suppose a 10-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of …
Analysis of potential additions to fixed assets. Long-term decisions; involve large expenditures. Very important to firm’s future. What are the methods of project evaluation? Non-discounted cash flow methods – payback period – accounting rate of return Discounted cash flow methods – internal rate of return – net present value
What is Payback Period? The amount of time required for an investment to generate cash flows to recover its initial cost. An investment is acceptable if its calculated payback is less than some prescribed number of years. Example:Year Cashflow0 …
Advantages of Payback Period No need for detailed analysis Simple to calculate and understand. Adjusts for uncertainty of later cash flows. Biased towards liquidity. Disadvantages of Payback Period Time value of money and risk ignored Ad hoc determination of acceptable payback period. Ignores cash flows beyond the cut-off date. Biased against long-term projects. What is …
What is ARR? Measure of an investment’s profitability. A project is accepted if ARR > target average return.ARR = average net profit / average book value Where:average net profit is total profit over ‘n’ years divide by ‘n’average book value is (initial investment + salvage value)/2 What is payback period?What is the advantages or …
Disadvantages of ARR The measure is not a ‘true’ reflection of return.Time value of money is ignored.Ad hoc determination of target average return.Uses profit and book value instead of cash flow and market value. Advantages of ARREasy to calculate and understand.Considers all profits of the project. What are the other methods of project evaluation? …