Your manager has tasked you with developing an investment planning model for common stocks based on the following assumptions: Sales for the current year are $1,000,000. Net sales are expected to increase by 2% per year for the next 5 years. Current investments in common stock is $250,000. Annual investment rate in common stock is 1% of net sales per year for the next 5 years. Dividends rate is estimated at 8% per year.

1. Create an investment planning model based on the assumptions given above. How much would the investments in common stock be worth at the end of the 5 years.
2. Based on your answer to question 1, what should the annual investment be if the companys goal were to reach $500,000 at the end of the 5 years? HINT: Use Goal Seek in Excel (Review Appendix A if needed).

Once you developed the above model, you began to think of these questions:

• Are net sales growth rates truly expected to be the same every year?
• Is it reasonable to expect a flat portfolio growth rate increase each year? We know that financial markets vary widely over time, so you are now thinking that a flat growth rate is not reasonable.

Based on your analysis and taking into consideration the above questions, you decide to create a simulation model that accounts for the following:

• Net sales growth rate per year from 1% to 6%
• Annual portfolio growth rate on average 8% with a standard deviation of 5%

1. Run the simulation model you created one time. What would be the value of the investments in common stock at the end of the 5 years?
2. Based on your answer to question 3, what should the annual investment rate need to be if the goal were to reach approximately $500,000 at the end of year 5? HINT