Problem

Lugar Industries is considering an investment in a new machine with the following information:
Machine cost
Setup cost
Salvage value
Life
Net operating expense savings:

225000
25000
50000
5 years

Per Year Saving

50000
90000
110000
120000
120000

End of Year 1
End of Year 2
End of Year 3
End of Year 4
End of Year 5

WACC
Tax rate
Assumed value of the machine at end of 5 years =

Cumulative
Saving
50000
140000
250000
370000
490000

10%
40%

If Lugar buys the machine, calculate the following:

1 Payback Period. Enter you answer and carry it out two decimal places. (For example a 2 year payback is e
Ans

Machine Cost
Setup Cost
Total Cost
Payback Period

=
=
=
=

225000
25000
250000
3.00 years

(Note: We have not considered the impact of tax on cash flows.)

Ans

Discounted Payback Period. Enter you answer and carry it out two decimal places. (For example a 2 year d
WACC

End Of
Year
1
2

10%

PV Of Per Cukulative PV Of
Per Year Saving Year Savings PEr Year Savings
50000
45455
45455
90000
74380
119835

3
4
5

110000
120000
120000

82645
81962
74511

202479
284441
358952

Total Cost

358952

Payback Period

5.00

Calculate the NPV. Round you answer to the nearest whole number. Do not use $, commas, or decimal poi

Ans

End Of Year
0
1
2
3
4
5

Per Year Saving

-358952
50000
90000
110000
120000
120000

WACC

10%

NPV
4

Based on the above information, calculate the IRR. Round you answer to the nearest two decimal places.
entered as 34.46.

Ans

End Of Year
Per Year Saving
IRR

0
-358952
10.00

50000

90000

5.Based on your calculations, should Lugar buy the machine?

A) Yes
B) No
Based on he calculaton above, Lugar should not buy the machine cause, it is a no profit no loss stage.
Problem

How much would a person need to invest in a retirement account each year based on the following assump

Current Age of Person

Current Retirement Account Balance
Years to Retirement
*Retirement Income in Todays Dollars
Average Inflation Rate
Years of Retirement Income Desired
Pre-Retirement Account Interest Earnings Rate
After Retirement Account Interest Earnings Rate
Effective Pre-Retirement Account Interest Earning Rate
Effective After-Retirement Account Interest Earning Rate

55
250000
10
60000
4%
15
9%
7%
13.36%
11.28%

*Assume the first retirement payment is available immediately upon retirement at the end of year 10.

6
Ans

Yearly amount of savings. Round you answer to the nearest whole number. Do not use $, commas, or deci
$34,567.50 would be entered as 34568.
Time Line
Age
Number Of Years
Current Retirement A/C Bal
Retirement Income In Today's D
PV of Retiral Benefits
Additional Investment Needed

55
0
250000
60000
$269,332
$19,332

56
1

57
2

Problem

For this question only, assume that you are living in the U.S. and the economy has been doing well for the
expereince this in the near future again. Assume the following information regarding the economy:
Current Unemployment Rate
GDP growth rate for past 4 years
Current Fed Funds Rate
Current 30 Year Mortgage Rate
Stock Market
Inflation rate for the past 4 years
7

5%
3.2% average
4.5%
7%
Historic Highs
3.5% average

If you are invested primarily in stocks as opposed to bonds, why might a recession hurt

Because in case of bonds we receive fixed income, but in caseof stock, there is no such fixed income. Mor
stocks, because of the stock price depreciation expectations.

Ans

Ans

If you do not expect a recession for at least 2 more years but expect an annual 5% inflation rate for each of
market or the bond market? Base your answer only on the impact of interest rate change. Explain.

If we do not expect recession for at least 2 more years, with expectations of 5% inflation rate, I would pref
return , which would take care inflation, whereas if I invest in bond, this may not happen.
Problem
Please use the following facts to analyze this problem:
Assume you just received a bill for services you and have the following two payment options:
Option 1:
Pay the entire bill of $600 now
Or
Option 2:
Pay:$130 now And$130 for each of the next 4 months

Ans

10
Ans

What annual interest rate (APR) are you paying if you choose Option 2? Assume monthly compounding.
$, commas or %. For example, 25.34% would be entered as 25.34.
Entire Amount

Pay each month

Total number of months

=
=

Rate of interst

=
=

600
$

130
4
9.62% (Excel "RATE" Function Is Used)
9.62

What effective annual interest rate (EAR) are you paying if you choose Option 2? Assume monthly compo
not use $, commas or %. For example, 25.34% would be entered as 25.34.
Effective Annual Rate

=
=

Please use the following facts to analyze this problem:

Facts and Assumptions:
Lease Term in Months
24

10.06%
10.06

Lease Down Payment

Monthly Lease Payments
Sales Tax Rate
Lease Buyout at End
Title Fee
Car Loan Market Rate
Outright Purchase Price Before

11

Ans

12

Ans

500
300
8%
15000
25
7%
19500

WHat is the NPV of the lease? Round you answer to the nearest whole number. Do not use $, commas, o
$34,567.50 would be entered as 34568.
Discount Rate
Lease Term In Months
Monthly lease payment

=
=
=

Net Present Value Of Lease

7%
24
300

7201 (Excel "PV" Function Is Used)

What would it cost you to buy the car today if you were paying cash? Round you answer to the nearest wh
as a positive number. For example, $34,567.50 would be entered as 34568.
Discount Rate
Lease Term In Months
No of months
Lease Down Payment
Monthly Lease Payment
Lease Buyout at end
Sales Tax @8%
Effective Cash Flows
Cost of Car

=
=

7%
24
0
500

1
300

500
300
$21,166 (Excel "NPV" Function Is Used)

(Assumption: Here assume that, car would be purchased in cash at the end of the leasse and there would b
13 If you lease this vehicle, are you paying a fair price for the lease? Explain
Ans

No, cause the cost of car as per lease is more as compared to purchase of vehicle outright.

14

Ans

The habit of spending a monthly amount of money has both a net present value impact and a future value i
currently spending $1,800 a year on cigarettes the financial impact of this habit. Do not focus on the healt
this habit on a NPV basis and a Future Value basis. Use the following assumptions to help in your calcula
Average Inflation rate for the cost of cigarettes
5%
Use a 20 year time period and compound yearly.
Assume a discount rate of 7% for NPV and 7% for the potential earnings if those dollars are invested inste
Discount Rate
Current Spending on Cigarette
Time Period
NPV

7%
1800
20
$19,069

lowing information:

$50,000

example a 2 year payback is entered as 2.00)

places. (For example a 2 year discounted payback will be entered as 2.00)

Years

use $, commas, or decimal points) (For example, $34,567.50 would be entered as 34568.

e nearest two decimal places. Do not use %) (For example, 34.4550% would be

110000

120000

120000

a no profit no loss stage.

based on the following assumptions to attain their retirement goal:

ent at the end of year 10.

Do not use $, commas, or decimal points ans enter as a positive number. For example,

58
3

59
4

60
5

61
6

62
7

63
8

my has been doing well for the past 4 years. This is not the case right now but hopefully we will
egarding the economy:

s, why might a recession hurt your investment portfolio? Explain your answer.

64
9
772820.34

e is no such fixed income. Moreover, when there is recession, no one would like to invest in

al 5% inflation rate for each of the next two years, would you rather be invested in the stock
rate change. Explain.

5% inflation rate, I would prefer to invest in stokc market and earn

ay not happen.

payment options:

sume monthly compounding. Round you answer to the nearest two decimal points. Do not use

"RATE" Function Is Used)

on 2? Assume monthly compounding. Round you answer to the nearest two decimal points. Do

mber. Do not use $, commas, or decimal points and enter as a positive number. For example,

"PV" Function Is Used)

d you answer to the nearest whole number. Do not use $, commas, or decimal points and enter

300

300

300

300

300

300

300

300

300

300

300

300

300

300

"NPV" Function Is Used)

of the leasse and there would be sales tax to paid on and above the sale price.)

hicle outright.

lue impact and a future value impact. Assume you have been asked to show a 20 year old who is
abit. Do not focus on the health issues or even the potential health costs. Just show the impact of
mptions to help in your calculations:

those dollars are invested instead of used to purchase cigarettes.

Years
(Excel "PV" Function Is Used)

65
10

66
11

67
12

68
13

69
14

70
15

71
16

10

11

12

13

14

15

300

300

300

300

300

300

300

300

300

300

300

300

300

300

72
17

73
18

74
19

75
20

76
21

77
22

78
23

16

17

18

19

20

21

22

300

300

300

300

300

300

300

300

300

300

300

300

300

300

79
24

23

24

300

300
15000
1200
16500

300