Problem 1: Your company is planning to borrow $1000,000 now and wants to repay the entire loan
Question:
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Problem 1: Your company is planning to borrow $1000,000 now and wants to repay the entire loan in equal annual installments over a period of 10 years. The bank will charge you 12% interest per year. Calculate the following:
(a) First calculate the equal annual payment (Use the formula or financial calculator or Excel for this, and then use this value to answer the following question) [5]
(b) Calculate the detail repayment schedule showing the following for each year: [10]
(i) Beginning balance,
(ii) Annuity Payment,
(ii) Interest Paid,
(iv) Principal Paid, and
(v) Ending balance
Problem 2: You are investing in a project that requires an initial investment of $500,000. The project will last for 10 years with the following additional cash flows (CF) at the end of each year:
Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
CF | -50,000 | 80,000 | 100,000 | 100,000 | 120,000 | 140,000 | 150,000 | 150,000 | 150,000 | 150,000 |
If the discount rate is 10%, calculate the payback periods in Excel for both the methods below;
(a) Classic Payback Method [10]
(b) Discounted Payback Method (aka, Cost Adjusted Payback Method) [10]
Problem 3: Your company received an investment proposal which requires an initial investment of $500,000 now. The project will last for 7 years. You also have the following information about this project;
Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
CF | 100,000 | 120,000 | 130,000 | 140,000 | 100,000 | 100,000 | 50,000 |
Discount Rate | 10% | 10% | 12% | 12% | 14% | 14% | 12% |
If you receive the above cash flows at the end of each year, calculate the NPV and clearly mention if you will invest in the project or not based on your result of NPV [10].
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