Purpose of Assignment The purpose of this assignment is for students to employ capital budgeting techniques using time value of
1 answer:
Answer:
Present Value 5,715,331.32
We are going to accept the project only if the initial investment is at 5,715,331 or below in order to achieve the return to support the cost of capital structure of the company
Accepting a project with a higher cost will not generate enought cashflow to sustain the patyment of debt and the return expected from the stockholders therefore, will generate a economic result and investor will leave the company for other which can sustain their desired return.
Explanation:
We are going to discount the yearly cash-flow at the given rate of 12.50%
then, the terminal value which is the present value of the future period will also be discounted at this rate.
The sum of all this will be the present value of the firm.
The formula we use the present value of a lump sum:
We are going to accept the project only if the initial investment is at 5,715,331 or below in order to achieve the return to support the cost of capital estructure of the company
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Answer:
Yes
Explanation:
From her current age of 28 to her retirement age of 65, RuthAnn has (65 - 28 =) 37 more years to work.
If she saves 11% of her annual income of $36,278.13 into a 401(k), she will be setting aside (11% * 36,278.13 =) $3,990.59 into the 401(k) account annually.
At 7.1% compounding rate, in 37 years, RuthAnn would have set aside an amount estimated by the future value of an annuity formula.
where FV is the future value, the amount that would have been set aside,
A = is the annual savings,
r = is the compounding rate, and
n = is the number of years.
Therefore, the total amount that would be saved up after 37 years =
= (3,990.59 * 11.6535)/0.071
= $654,990.31.
By spending $32,523 annually from an account earning 7.1% compound interest rate for 30 years, the present value of the total amount needed by RuthAnn today that will be sufficient for her retirement spending can be estimated using the present value of an annuity formula.
=
= (32523 * 0.8723)/0.071
= $399,574.83.
Since the amount saved up ($654,990.31) is more than the total amount required for RuthAnn's retirement ($399,574.83), RuthAnn has more than sufficient to meet her Retirement goal.
Specifically, the amount she has saved up can support a maximum annual spending which can be estimated from the present value of an annuity formula.
where PV = the amount saved up, $654,990.31,
A = the annual spending which we are estimating,
r = the 7.1% compound interest rate,
n = the number of years to retirement.
= 654,990.31 = (A * 0.8723)/0.071
= A = 654,990.31/0.8723 * 0.071
= A = 53,312.29
Thus, the amount saved up can support a maximum retirement spending of $53,312.29, which is higher than the $32,523 annual income needed by RuthAnn for her retirement.