1. You

have to show you full work in problems 1 and 2 in order to get the full credit.

2. A

spreadsheet with your answers for problem 3to be emailed to me separately. (All

functions have to be there; numbers without functions are not accepted). Use

Excel Functions we introduced in our notes to solve Q3

3. The

main goal of this project is to learn some useful techniques in calculating

TVM, NPV, and financial modeling functions using excel.

4. I

highly advise you to do this project on your own first and then compare your

answers with others.

1.Congratulations

on the birth of your daughter! Now is a

good time to start saving for her college education. Your spouse’s parents have offered to give

you $10,000 today to begin the fund.

Your parents are currently selling a large quantity of land. They expect to contribute an additional

$12,500 to your daughter’s college fund 3 years from today. You have no money of your own currently

saved, but you plan to begin a monthly savings plan at the end of this

month. You predict that your daughter

will need annual tuition payments once per year (assume they are at the

beginning of the year) with the first payment at her 18th birthday

when she enrolls in school.

Additionally, she will need annual living expenses at the beginning of

each year, starting with her 18th birthday and ending with her 21st

birthday. If she were starting college

today, tuition would $12,000 per year, and living expenses would be $12,000 per

year. Living expenses are payable on the

first day of each year. Assume that she will complete college in four years.

Assume that the cost of living and your savings will rise at the rate of

inflation which you expect to be 3% per year.

Assume that tuition costs will rise at the rate of 4% annually.

Assume

that you will begin a monthly savings program which will start one month from

today and that you will save through to the date of her last tuition payment

(her 21st birthday). You will

save $176.76 in the first month and your savings will increase at the rate of

inflation. Based on these plans, how

much money will you have on the date she begins college to buy her a car? The interest rate is 8%. All interest rates, growth rates, and

inflation rates are EAR’s. (25 points)

2. Donovan Industries, a large consumer

durables manufacturer, is introducing a new line of refrigerators for college

dorm rooms. Donovan will have to build a

new plant to manufacture the refrigerators.

This plant will cost $15 million to build. Two-thirds of the initial investment is

payable today, and the remaining one-third is due in one year. The new plant will start operating in year 2

and will produce 125,000 refrigerators per year. The price of the refrigerators would be $175

if Donovan could introduce the refrigerators today. Variable costs of production would be $65 if

Donovan could start production today. All of the variable costs are incurred

solely due to the new product.

Similarly, annual fixed incremental costs of production of $4.5 million

in today’s dollars will be incurred each year.

In addition, $1.25 million of allocated overhead based on the expected

annual costs of Donovan’s headquarters staff and firm-level costs has been

assigned by the accounting system. These

costs will be incurred regardless of whether Donovan undertakes the new project

or not. Donovan’s tax rate is 25%. The project is expected to be terminated

after 4 years of operations. Depreciate

the new plant down on the straight line basis over 4 years with no assumed salvage

value. Assume that refrigerator prices

and fixed and variable costs of production will increase at the rate of 4% per

year throughout the life of the project.

(a) Calculate the nominal cash flows for each relevant year.

(b) Suppose the required return for the project is 9%. What is the NPV? Should you accept the

project? Why? (Assume cash flows follow the end-of-year convention)

(c) Calculate the payback on this project. If the required payback is 4 years, and cash

flows follow the end of year convention, what is your recommendation for this

project? (25 points)

3.The following problems to be done on

using the spreadsheet, each on a separate sheet.

(a) Suppose that Keown

Motor Corp. paid a dividend per share of $0.62 last year. How long will it take Keown’s dividend to

increase by 50% if its dividends grow at a rate of 10% per year?(5 points)

(b) If Keown Motor had

earnings per share of $0.75 last year, at what growth rate will earnings have

to grow so that earnings per share and dividends per share are equal amounts

using the time period that you calculated in (a)?(5 points)

(c) Suppose that you

wish to purchase a $320,000 house. You

will pay 20% down and finance the balance with a 15-year mortgage at a rate of

4.80% (APR). What will your monthly

payment be?(5 points)

(d)

Suppose that your employer has a unit that bottles drinks. You need to replace the existing machine that

is used to bottle water. The Bottle

Master machine will cost you $1,020,000, has a 6 year life, and has before tax

cash operating costs of $50,000 per year.

Alternatively, Packard Machinery has a bottling machine that will cost

you $450,000, has a 3 year life, and has before tax cash operating costs of

$75,000 per year. Assume that

depreciation expense is calculated for both tax and reporting purposes using

the straight line method with no salvage value, the required return is 6%, and

that your tax rate is 40%. Assume the

productivity of the 2 machines is the same and the revenue streams associated

with them are equal. Compute first the after tax annual cash flow for each

machine, and then use a replacement chain to recommend which machine to

purchase. (10 points)

(25 points)

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