+598 The expansion will occur over 4 years and is expected to require $2.8 million.
Management has developed a payment plan for carrying out this expansion. The plan requires a cash input of $300,000 now, $700, 000 one year from now, $800,000 two years from now, and finally, $1,000,000 four years from now.
Before the final decision on implementation, the company treasurer is asked to assess the plan to determine if the current $2.6 million allocation will meet the $2.8 million in payment obligations of the plan over the four-year period. The Treasurer has predicted interest rates over the next four years to be as follows:
Year 1: interest rate of 4.5% p.a. compounded semi-annually
Year 2: interest rate of 5.0% p.a. compounded semi-annually
Year 3: interest rate of 5.0% p.a. compounded semi-annually
Year 4: interest rate of 5.5% p.a. compounded semi-annually
6. What is the equivalent value, twelve months from now, of the cash available to fund the expansion? Show your calculations.
7. Twelve months from now, what is the total of the value of the required cash payments? Show your calculations.
8. Twelve months from now, what is the difference between the value of the funds available from (6), and the total present value of the required payments determined in (7)? Show your calculations.
9. What is the accumulated value of this difference at the end of the expansion period? Show your calculations.
Had to revise the questions because of the nature of the assignment. This will be easier for explanation. Any help with steps would be greatly appreciated. Thanks
+495 Yes, now that I look at it differently I think I was wrong before, and I (think I) can fix that now.
The price of the expansion will be 2.8 million, but management has 2.6 million right now.
Assuming "now" begins at the end of the statements made, 300,000 was transferred from management to the cost of the expansion, meaning management has 2.3 million dollars and the cost is now 2.5 million dollars.
6. 12 months from now, the 2.6*10^6 - 3*10^5 dollars will have grown to 2,300,000*1.045^2 = 2,511,657.5 dollars.
If I understand the question correctly, management has 2,511,657.5 dollars to fund the expansion.
7. Management already paid 300,000 from the start. But the payment plan requires 700,000 to be deducted from that at the end of year one. 300,000 + 700,000 = 1,000,000. This is how much management has been required to pay, so far. So, 2,511,657.5 - 700,000 = 1,811,657.5 is how much funding management has right now. And 2,500,000 minus the 700,000 payment is 1,800,000.
8. The difference between available funds and the expansion cost is now a positive 11,657.5.
Either 2,511,657.5 - 2,500,000 or 1,811,657.5 - 1,800,000 will give you this value.
9. And by applying interest to that, at the end of the expansion plan is 11,657.5 * 1.05^4 * 1.055^2 = 15,771.30
I'm not totally sure this is right because I might misunderstand the questions, and check my work.
Sorry it took so long.
I hope this helps, NeedSupply.
