Complete the following and submit it in a Word document. Be sure to show your process and calculations:
As a financial analyst, you have been brought in to help various organizations or individuals to make decisions on possible financial investments that have been presented to them. Solve each of these problems using standard discounted cash flow analysis techniques.
1. Living Color Co. is facing a decision on a pending project with the following cash flows. If the required return for the project is 9.9 percent, what is the project's NPV? Should Living Color move forward with the project? Show all calculations to arrive at the NPV.
Living Color Cash Flow
Year Cash Flow
0 -$31,870
1 8,570
2 10,370
3 14,960
4 16,410
5 11,540
2. Kathy Flemings is planning on buying a new car in seven years. She thinks that she will need about $25,000. She has decided to invest $2,500 today and will do so at the beginning of each of the next six years for a total of seven payments. If her investment can earn 12 percent annually, how much will she have at the end of seven years? Will this be enough for her new car? Show all calculations to arrive at this answer.
3. Foodelicious Corp. is evaluating whether it should purchase an ethnic restaurant in Manhattan. The current owner had originally signed a 25-year lease, of which 16 years still remain. Foodelicious Corp. expects the restaurant to continue to have sales (and net cash flows) of about the same for the remainder of the lease. Last year, the restaurant brought in net cash flows of $310,000. The current owner is asking $1,950,000 for the business. If Foodelicious evaluates similar investments using a 15 percent discount rate, what is the present value of this investment? Should it take over the investment? Show all calculations to help Foodelicious make a decision.
4. Mary Lynn Sirianni believes that she will need $750,000 in an IRA investment to live a comfortable life when she retires in 30 years. She is offered an IRA investment that will require her to invest $3,000 a year for the next 30 years, starting at the end of this year. The investment will earn 13 percent annually. How much will she have at the end of 30 years? Should she make this investment? Show all calculations to help her make a decision.
Guide On Rating System
Vote
I. Living Color Co. NPV Calculation:
Using the formula for NPV:
NPV = Σ (Cash Flow / (1 + r)^t)
Where:
r = required return = 9.9%
t = year
Cash Flow = Cash Flow at year t
NPV = (-$31,870 / (1+0.099)^0) + ($8,570 / (1+0.099)^1) + ($10,370 / (1+0.099)^2) + ($14,960 / (1+0.099)^3) + ($16,410 / (1+0.099)^4) + ($11,540 / (1+0.099)^5)
NPV = (-$31,870 / 1) + ($8,570 / 1.099) + ($10,370 / 1.207801) + ($14,960 / 1.328636) + ($16,410 / 1.461584) + ($11,540 / 1.611472)
NPV = -$31,870 + $7,790.81 + $8,586.46 + $11,251.155 + $11,215.202 + $7,169.151
NPV = $3,142.75
As the NPV is positive, Living Color Co. should move forward with the project.
II. Kathy Flemings Investment Calculation:
Using the formula for Future Value of an Annuity:
FV = Pmt * ((1 + r)^n - 1) / r
Where:
Pmt = Payment per period = $2,500
r = interest rate per period = 12%
n = number of periods = 7
FV = $2,500 * ((1 + 0.12)^7 - 1) / 0.12
FV = $2,500 * ((1.12^7 - 1) / 0.12)
FV = $2,500 * (3.10828048 - 1) / 0.12
FV = $2,500 * 2.10828048 / 0.12
FV = $43,709.67
Kathy will have $43,709.67 at the end of seven years, which is more than enough for her new car costing $25,000.
III. Foodelicious Corp. Present Value Calculation:
Using the formula for Present Value of a Perpetuity:
PV = Cash Flow / r
Where:
Cash Flow = $310,000
r = discount rate = 15%
PV = $310,000 / 0.15
PV = $2,066,666.67
As the owner is asking $1,950,000, the present value of the investment is higher ($2,066,666.67). Foodelicious Corp. should take over the investment.
IV. Mary Lynn Sirianni Investment Calculation:
Using the formula for Future Value of an Annuity:
FV = Pmt * (((1 + r)^n - 1) / r)
Where:
Pmt = Payment per period = $3,000
r = interest rate per period = 13%
n = number of periods = 30
FV = $3,000 * (((1 + 0.13)^30 - 1) / 0.13)
FV = $3,000 * ((1.13^30 - 1) / 0.13)
FV = $3,000 * (40.72027906 - 1) / 0.13
FV = $3,000 * 39.72027906 / 0.13
FV = $915,016.99
Mary will have $915,016.99 at the end of 30 years, which is more than the $750,000 needed for her retirement. She should make this investment.
This concludes the financial analysis using discounted cash flow techniques for the given scenarios.
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