1. The owner of the rival business agrees to sell to you. He will take payment one of three different ways. Using the information below, calculate which payment option would make more financial sense to you and state which you should accept. Use formulas not tables, and show working. Make a definite statement as to which option should be chosen. (5 marks)

Hint: You need to use your skills calculating the PV of future cash flows.

Option 1: An upfront Payment of $100,000 and a single fixed payment in 1 year of $35,000.

Option 2: An upfront Payment of $20,000, followed by further payments of $10,000 at the end of each month for the following 12 months.

Option 3. No upfront Payment. 50% of profit for the next two years, payable semi-annually as the profits are earned.

The expectations that you have for the new business and the financial economy are as follows:

Expected profits for the purchased business will be $140,000 in year 1, and $160,000 in year 2. Assume profits are earned in a consistent manner throughout the year.

Expected annualised interest rates are flat from cash out for 1 year at 5% and then rise to 6% at 1.5 years and to 7% for the 2 year.

2. You just sold your car for $18,000. You have deposited it into your bank account. You are keen to invest the funds for one year as you are concentrating on your studies for the moment. Which of the following options for depositing the funds will earn you more interest over the coming year. Show your calculations including formula. (2 marks)

a. Fixed Interest rate of 3% paid at maturity.

b. 2.9% Interest rate compounded and reinvested on a monthly basis.

c. 2.8% Interest rate compounded and reinvested on a daily basis.