Week 1 Assignment Bus 640

Week 1 Assignment

1. A generous university benefactor has agreed to donate a large amount of money for student scholarships. The money can be provided in one lump-sum of $10mln, or in parts, where $5.5mln can be provided in year 1, and another $5.5mln can be provided in year 2. Assuming the opportunity interest rate is 6%, what is the present value of the second alternative? Which of the two alternatives should be chosen and why? How would your decision change if the opportunity interest rate was 12%? Please, show all your calculations.

ANSWER. Using the equation PV=FVn/(1+r)n to find the Present Value where n = number of times the percentage is taken, in this case 1. The r is the rate for the first equation it is 0.06 and for the second it is 0.12 representing 6% and 12% respectively. FV is 5.5mil.

5,500,000/1.06 = 5,188,679.25 This means that initially the donor will give $5,500,000 and then on the second year the donor will give 5,188,679.25 which is 5,500,000 minus the 6% opportunity rate. It would be more beneficial for the student scholarships to receive the money in two installments with the interest rate at 6%.

5,500,000/1.12 = 4,910,714.29 This means that initially the donor will give $5,500,000 and then on the second year the donor will give $4,910,714.29 which is 5,500000 minus the 12% opportunity rate. It would be more beneficial for the student scholarships to receive the money in two installments still because the sum of the two installments still exceeds the $10,000,000 that would be distributed if a single installment were chosen.

2. An angel investor is considering investing in one of two start-up businesses and is evaluating the expected returns along with the risk of each option in order to choose the better alternative.

* Business 1 is an innovative protein energy drink, which has ENPV of $100,000 with a standard deviation of $40,000.

* Business 2 is a unique chicken wings dipping sauce with an ENPV of $60,000 and...