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Cash Flow and Interest

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I plan to work for 10 years, quit my job and then travel the world. I save $1,000 a year for the first 5 years and $2,000 a year for the next 5 years. These savings cash flows will start one year from now. I received a $5,000 gift. If I put the gift now, and the future savings when they start, into an account which pays 8 percent compounded annually, what will my financial "stake" be when I begin travel 10 years from now?

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The formula of future value is:
Future Value = Present value * (1+interest rate)^(Years to maturity)

In this case, for the 5000 gift:
we input PV = 5000
interest rate = 8%
Number of years = 10
then by a financial calculator, or EXCEL "=-FV(8%,10,,5000)",
we can compute FV = ...

Solution Summary

The solution examines the cash flow and interest rate for a job.

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Cash flow estimation

We assume that the Kroger Co. is considering a new project. The project has 6 years life. This project requires initial investment of $180 million to construct building, and purchase equipment, and $12 million for shipping & installation fee. The fixed assets fall in the 5 year MACRS class. The salvage value of fixed assets is $25 million. The number of units of the new product expected to be sold in the first year is 870,000 and the expected annual growth rate is 10%. The sales price is $250 per unit and the variable cost is $175 per unit in the first year. The required net operating working capital (NOWC) is 18%. The company is in the 33% tax bracket. The project is assumed to have the same risk as the corporation use the WACC as the discount rate from the attached excel sheet.

1. Compute the depreciation basis and annual depreciation of the new project.

2. Estimate annual cash flows for the 6 years.

3. Draw a time line of the cash flows.

4. Using the WACC for Kroger company as discount rate, apply capital budgeting
analysis techniques (NPV, IRR,PI, and Payback Period) to analyze the new project.

Please see the cash flow estimation template attached.

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