+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
Similar to previous question but with alteration below :
Since the Treasurer’s investment plan has a guaranteed rate for five years, suppose the company decided to delay the expansion for twelve months to take advantage of this fact. The payment plan to fund the expansion would retain the same payment schedule. However, the final payment in the last year would increase by 10%, due to projected increase in construction costs.
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.
Any help with calculations would be greatly appreciated, thanks very much
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
ANSWERS:
6. =$2,737,859.32- This is the FV of $2,600,000 one year from now. Use this formula to get this:
FV=PV[1 + R]^N=FV OF $1 TODAY.
7.Since the PV of all the cash payments inculding the 10% increase in the last payment is=$2,579,689.61. Twelve months from now, it will be worth=$2,697,081.61. Use the exact same formula above.
8. $2,737,859.32 - $2,697,081.61=$40,777.71
9. The accumulated value of this difference will be=$52,797.30. Use the exact same formula above.
