Submitted by: Submitted by lenhardt86
Views: 224
Words: 658
Pages: 3
Category: Business and Industry
Date Submitted: 05/19/2013 08:14 PM
Question 1
Present Value: $4,830,188.68
Future Value: $5,120,000.00
Virginia’s current wealth is $4,830,188.68, which is the amount she can spend and consume today. If she doesn’t consume or spend her money today, she will be able to spend $5,120,000.00.
Question 2
NPV-Ranking:
Rank | Investment | NPV |
1 | $3,000,000 | 1.15 |
2 | $2,000,000 | 1.11 |
3 | $4,000,000 | 1.09 |
4 | $1,000,000 | 0.70 |
When it comes to the decision whether to accept or reject a project, the Net Present Value (NPV) is very helpful. Every project with a positive NPV may be undertaken. When deciding between several projects with a positive NPV, one has to rank each of them and invest in the project with the highest NPV.
According to the above ranking, we’ll advise Virginia to take the $3,000,000 investment opportunity.
When investing $3,000,000, Virginia would still have $1,000,000 to put in the bank (6% interest). So her today’s wealth would be $1,000,000, but her future wealth including the Cash Flow would be $5,460,000 ($1,060,000 + $4,400,000).
Question 3 and 4 combined
Supposing that Virginia has a strong preference for current consumption and is investing $3,000,000 today, she would have to get a loan in the amount of $2,800,000. Otherwise her preferences cannot be met.
Today | End of year 1 |
Investment | - $3,000,000 | Future CF | $4,000,000 |
Rest of endowment | $1,000,000 | Bank loan + interest | - $2,968,000 |
Bank loan | $2,800,000 | | |
Sum | $800,000 | Sum | $1,432,000 |
The Future Cash Flow allows Virginia to get a bank loan in order to have $3,800,000 today for her consumption. She will be able to pay back the loan including its interest ($168,000) by the end of year 1.
Question 5
We have two approaches to this question:
First, both the savers and the spenders are equal in number and have equal power on the corporation (cash of $4 million). Because the question mentions that“ While all individuals prefer current...