Question
A . You are a financial manager at your firm and you have been tasked with evaluating a potential investment. This project has a one-year
A. You are a financial manager at your firm and you have been tasked with evaluating a potential investment. This project has a one-year time horizon. If the decision is made to invest in this project, it will generate a positive cash flow to the firm of $27.5 million one year from now.
- The prevailing interest rate available to the firm for borrowing/lending is 6.8%.
- What is the MOST that your firm should be willing to pay today to invest in this project in order to generate positive value (such that Benefits Costs > 0). Choose the most appropriate response.
B.On your first birthday, your parents purchased a savings bond for you that can be redeemed on your 26th birthday (its maturity date) for its face value of $5,000.
If the relevant interest rate for this savings bond is 2.5%, what price did your parents originally pay when they purchased this savings bond?
C.Building upon the previous question B You may choose to redeem the savings bond for its face value of $5,000 on its maturity date. However, you also have the opportunity to NOT redeem the bond on its maturity date and allow the savings bond to continue to accumulate interest (2.5%) for an additional 20 years. If you choose to allow the bond to continue to accumulate interest for a further 20 years, what will the value of the bond when it ceases to earn any more interest.
D.You are a financial manager for a town that is considering whether it should resurface a local roadway either this year or next year. A local asphalt contractor has provided your town a quote to resurface the street this year of $2.6 million, payable immediately. If the town chooses to wait until next year, the company will allow you to lock in a price of $3.0 million, payable one year from today. If the relevant interest rate available to the town is 3.5%, should the company sign the contract to resurface the street this year, or next, and why?
E.Best Buy is running a 1-Year, Same as Cash promotion on all large appliances and electronics. What this means is that you can purchase a large appliance or electronic such as a refrigerator or television today, but not have to pay for it for one whole year and you will pay the same price one year from now as you would today. This is a type of 0% financing promotion, meaning they are offering to, in effect, let you purchase the item on credit with no interest charges. You decide to purchase a $1,400 television and take advantage of the promotion, meaning you will not owe them the $1,400 until one year from today. If your bank is offering 4% interest on savings deposits, what is the true cost of the TV to you today?
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