Rebotar Inc, makes basketballs. Their fixed costs are $3450 Variable costs are $12 per basketball, If the basketball is priced a
1 answer:
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Answer:
i. Discounted cashflow equations.
a. $180,000 at the end of five years.
This is a lump sum present value/ discounted cashflow which can be calculated as;
Formula = 180,000 / ( 1 + r)^n
= 180,000/ ( 1 + 12%)^5
= $102,136.83
b. $11,400 a year forever
This is a perpetuity. The present value/ discounted cashflow of a perpetuity is calculated as;
Formula = Amount/rate
= 11,400/12%
= $95,000
c. $19,000 for each of 10 years.
This is an annuity. The formula for calculating the Present value/ discounted cashflow of an annuity is;
where <em>i </em>is interest rate and <em>n</em> is number of periods
= $107,354.24
d. $6,500 next year and increasing thereafter by 5% a year forever.
This is a growing perpetuity. The present value/ discounted cashflow formula is;
= Amount / ( discount rate - growth rate)
= 6,500 / ( 12% - 5%)
= $92,857.14
ii. Choose <u>$19,000 for each of 10 years</u> as it has the highest present value.
Answer:
It will be sold at $1,186.71
Explanation:
We will calculate the present value of the cuopon payment and the maturity at the new market rate of 7%
<u>The coupon payment will be calcualte as the PV of ordinary annuity</u>
C $50 (1,000 x 10%/2 as there are 2 payment per year)
time 16 (8 years x 2 payment per year)
rate 0.035 (7% rate / 2 payment per year)
PV $604.7058
<u>The maturity will be calculate as the PV of a lump sum</u>
Maturity 1,000.00
time 8 years
rate 0.07
PV 582.01
<u>The market price will be the sum of both:</u>
PV cuopon $604.7058
PV maturity $582.0091
Total $1,186.7149