at local events. 000.00 at the end Assume you are considering buying a popcorn cooker to sell popcorn at locale The machine costs $12,000.00, and has an expected salvage value of $2,000.00 of an expected 10 year life. You think you can generate gross sales of $4,000.00 year, and you think cash expenses will average $1725.00 per year for the first ye and $1,250.00 per year for the second five years of the machines life as you learn about how to operate it efficiently. Calculate both the Payback Period, and the Rate of Return for this proposed investment, AND explain why the simple rate o may provide a misleading answer in this instance. imple rate of return 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 $500 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 when you die). You make the first payment right now. and then 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 $106 per month for a $100,000 policy with the rate guaranteed for 20 years in other words you would pay the $106 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 $500 and the $106) and see how long it would take you to accumulate the $100,000 in an account so vou could "self-insure". Assume you can earn 8% (annual) on the invested difference (but remember you are investing and compounding monthly). How long will it take 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 Future Values a spreadsheet. Should you buy the universal life, or buy the term insurance then self-insure? 3 A tractor and mower costs $32,000, at the present time. You can $6,500 at the ends of years 1 through 6. The equipment will be are done using it at the end of year 6. Calculate the net present va mower investment using a discount rate of 8%. present time. You can earn a net return of ugh 6. The equipment will be worth $4,000 when you ne the net present value of the tractor- 4. A saw mill for cutting wood costs $29,000 at the present time. You of $7,000 at the end of year 1, $7,200 at the end of year 2, $7,400 a and $7,500 at the end of year 4. The equipment will be worth $7,50 using it at the end of year 4. Calculate the net present value of the milli rate of 8% 5. Based on NPV, 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 saw mill investment is much more risky with regard to the expected cash flows and to the salvage value of the equipment than the tractor and mower is. What would you change in your analysis to compare the two investments if that were the case? at local events. 000.00 at the end Assume you are considering buying a popcorn cooker to sell popcorn at locale The machine costs $12,000.00, and has an expected salvage value of $2,000.00 of an expected 10 year life. You think you can generate gross sales of $4,000.00 year, and you think cash expenses will average $1725.00 per year for the first ye and $1,250.00 per year for the second five years of the machines life as you learn about how to operate it efficiently. Calculate both the Payback Period, and the Rate of Return for this proposed investment, AND explain why the simple rate o may provide a misleading answer in this instance. imple rate of return 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 $500 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 when you die). You make the first payment right now. and then 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 $106 per month for a $100,000 policy with the rate guaranteed for 20 years in other words you would pay the $106 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 $500 and the $106) and see how long it would take you to accumulate the $100,000 in an account so vou could "self-insure". Assume you can earn 8% (annual) on the invested difference (but remember you are investing and compounding monthly). How long will it take 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 Future Values a spreadsheet. Should you buy the universal life, or buy the term insurance then self-insure? 3 A tractor and mower costs $32,000, at the present time. You can $6,500 at the ends of years 1 through 6. The equipment will be are done using it at the end of year 6. Calculate the net present va mower investment using a discount rate of 8%. present time. You can earn a net return of ugh 6. The equipment will be worth $4,000 when you ne the net present value of the tractor- 4. A saw mill for cutting wood costs $29,000 at the present time. You of $7,000 at the end of year 1, $7,200 at the end of year 2, $7,400 a and $7,500 at the end of year 4. The equipment will be worth $7,50 using it at the end of year 4. Calculate the net present value of the milli rate of 8% 5. Based on NPV, 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 saw mill investment is much more risky with regard to the expected cash flows and to the salvage value of the equipment than the tractor and mower is. What would you change in your analysis to compare the two investments if that were the case