1. Assume you are considering buying a food truck to sell food at local events. The ready to use outfit costs $55,000.00, and has an expected salvage value of $10,000.00 at the end of an expected 10 year life. You think you can generate gross operating revenues of $21,000.00 per year for each of the first 5 years, and you think cash expenses will be $15,000.00 per year for the first 5 years. After that you think you can find a few more customers, so you think gross operating revenue will increase to $28,000.00 per year for the second 5 years, with cash expenses expected to increase slightly to $18,000.00 per year for the second five years of the truck's life as you learn more about how to run the business. Calculate both the Payback Period, and the Simple Rate of Return for this proposed investment, AND explain why the simple rate of return may provide a misleading answer in this instance. 2. After graduation you will be hounded by insurance agents interested in selling you "whole life" or "universal life" insurance. Assume (realistically) that there is a plan which you pay $450 per month for 20 years, and then you have your ($100,000 life insurance policy "paid up" for life (you never have to pay any more premiums, but you are guaranteed a $100,000 payout whenever you die). You make payments at the end of each month for a total of 240 payments. You want to compare the value of that plan to buying term insurance which costs you $95 per month for a $100,000 policy with the rate guaranteed for 20 years (in other words you would pay the $95 monthly premium for 20 years, then drop the policy and your coverage would end). The relevant comparison is to look at investing the difference (between the $450 and the $95 ) and see how long it would take you to accumulate the $100,000 in an account so you could "self-insure". Assume you can earn 9% (annual) on the invested difference (but remember you are investing and compounding monthly). How long will it take you to accumulate $100,000 ? How much will you have accumulated at the end of 20 years? Solve the problem using the "Brute Force Method for finding monthly Future Values" in a spreadsheet. ould you buy the universal life, or buy the term insurance then self-insure? 3. A local restaurant is for sale fully equipped for $125,000. At the present time. You project you can eam a net return of $25,000 each of years 1 through 6 (assume at the end of each year for simplicity. The place and equipment will be worth $30,000 when you are done using it at the end of year 6 . Calculate the net present value of the restaurant investment using a discount rate of 8%. 4. A swather for mowing hay costs $125000 at the present time. You can earn a net return of $27,000 at the end of year 1,$29,000 at the end of year 2,$31,000 at the end of year 3, and $32,000 at the end of year 4 . The equipment will be worth $47000 when you are done using it at the end of year 4 . Calculate the net present value of the mill using a discount rate of 8%. 5. Based on these raw NPV calculations, which investment looks better? Explain why this comparison is not a good idea. 6. Find the annuity which is equivalent each of the above investments NPV (questions 3 and 4). Based on the annuity equivalent, which investment is better? Why? 7. Based on the information so far, which one would you choose? Why? 8. Now assume that the restaurant investment is much more risky with regard to the expected cash flows and to the salvage value of the equipment than the swather investment is. What would you change in your analysis to compare the fwo investments if that were the case
