Assignment 1: DiscussionShort-Term Financing Needs

After reading your report, as well as comments by others on the team, the Genesis Energy team began to understand the importance of cash flow and financing in high-growth scenarios. The Genesis Energy accountant suggested that the focus should be on developing a financial strategy that would ensure operational needs are met through short-term financing. The Genesis Energy team instructed Sensible Essentials to explain in basic terms the factors and mechanics necessary to determine short-term financing needs. As the finance expert for Sensible Essentials, do the following:

Explain the concept of working capital and its importance to Genesis Energy.

Describe the mechanism and methodology used to ensure that operational needs are met through short-term financing. Explain why this methodology is important to Genesis Energy.

Explain how working capital represents the assets that are needed to carry out the day-to-day operation and how working capital can act as a source of financing or increase the need for financing.

In your response, be sure to consider the time value of money and the relative advantages and disadvantages of short-term loans versus internally generated funds.

Please complete the mini case.

Build a Model: The Time Value of Money

Start with the partial model in the file Ch04 P35 Build a Model.xls from the textbooks Web site. Answer the following questions, using a spreadsheet model to do the calculations.

a. Find the FV of $1,000 invested to earn 10% annually 5 years from now. Answer this question first by using a math formula and then by using the Excel function wizard.

b. Now create a table that shows the FV at 0%, 5%, and 20% for 0, 1, 2, 3, 4, and 5 years. Then create a graph with years on the horizontal axis and FV on the vertical axis to display your results.

c. Find the PV of $1,000 due in 5 years if the discount rate is 10% per year. Again, work the problem with a formula and also by using the function wizard.

d. A security has a cost of $1,000 and will return $2,000 after 5 years. What rate of return does the security provide?

e. Suppose Californias population is 30 million people and its population is expected to grow by 2% per year. How long would it take for the population to double?

f. Find the PV of an ordinary annuity that pays $1,000 at the end of each of the next 5 years if the interest rate is 15%. Then find the FV of that same annuity.

g. How would the PV and FV of the above annuity change if it were an annuity due rather than an ordinary annuity?

h. What would the FV and PV for parts a and c be if the interest rate were 10% with semiannual compounding rather than 10% with annual compounding?

i. Find the PV and FV of an investment that makes the following end-of-year payments. The interest rate is 8%.

i. Find the PV and FV of an investment that makes the following end-of-year payments. The interest rate is 8%.

Year Payment

1 $100

2 $200

3 $400

j. Suppose you bought a house and took out a mortgage for $50,000. The interest rate is 8%, and you must amortize the loan over 10 years with equal end-of-year payments. Set up an amortization schedule that shows the annual payments and the amount of each payment that repays the principal and the amount that constitutes interest expense to the borrower and interest income to the lender.

j. Suppose you bought a house and took out a mortgage for $50,000. The interest rate is 8%, and you must amortize the loan over 10 years with equal end-of-year payments. Set up an amortization schedule that shows the annual payments and the amount of each payment that repays the principal and the amount that constitutes interest expense to the borrower and interest income to the lender.