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PROBLEM #1
Ricky and Lucy have decided to refinance their home mortgage loan. Their current home mortgage loan is for \$500,000. The mortgage interest rate is 6.75% and it is to be paid off in 30 years with equal monthly payments. After 3 full years of payments, Ricky and Lucy will refinance the balance at 3.0%, to be paid off in 15 years with equal monthly payments. What will Ricky and Lucy's new monthly payments be? (Please be sure to show how calculations are made. Excel alone is not sufficient. Be careful with round-off, because a mortgage payment includes cents, as well. Answer must be precise.) Show calculations.

PROBLEM #2

Use the information for the question(s) below.

The Nitram Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is \$30,000 and the machine will be depreciated straight line over its three-year life to a residual value of \$0.

The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Nitram will charge its customers is \$18 each and is to remain constant. The canes have a cost per unit to manufacture of \$9 each.

Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Nitram Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.

a. What is the incremental EBIT in the first year for the Nitram Corporation's project?

b. What is the depreciation tax shield for the Nitram Corporation's project in the first year? Explain what this means.

c. What is the amount of incremental income taxes that the Nitram Company will pay in the first year on this new project?

d. What is the required net working capital in the first year for the Nitram Corporation's project?
e. What is the required net working capital in the second year for the Nitram Corporation's project?

PROBLEM #3

The Signal Company is planning on investing in a new project. This will involve the purchase of some new machinery costing \$450,000. The Signal Company expects cash inflows from this project as
detailed below:

Year
One Year
Two Year
Three Year
Four
\$200,000 \$225,000 \$275,000 \$200,000

The appropriate discount rate for this project is 16%. Show calculations.

a) What is the payback period for this project?

b) What is the IRR for this project?

c) What is the profitability index for this project?

d) What is the NPV for this project

PROBLEM #4

Use the table for the question(s) below.

Project Cash flow today Cash flow
in one year
"alpha" -18 23
"beta" 15 -20
"gamma" 15 -12
"delta" -16 21

Assume that the interest rate is 10%. Show calculations.

a) Rank each of the four projects from most desirable to least desirable based upon NPV.

b) Which project would you invest in first?

c) Are there any projects that you would not invest in?

PROBLEM #5

Use the table for the question(s) below.

Project Cash flow today Cash flow
in one year
"eenie" 10 -8
"meenie" -10 15
"minie" 10 -15
"moe" -15 20

a. If the risk-free interest rate is 10%, then what is the NPV for "meenie" ?
b. If the risk-free interest rate is 10%, then what is the NPV for "minie" ?
c. If the risk-free interest rate is 10%, then of the four projects listed, if you could only invest in one project, which one would you select?
d. If the risk-free interest rate is 10%, then of the four projects listed, which project would you never want to invest in?

PROBLEM #6 (8 points)

The Engineering Economics Finance Company (EEFC) plans to receive \$990,000 next year from a certain investment, with increases of 5% per year. If N = 4 years and the interest rate is 10%, determine the present worth of the cash flows. Show calculations.

PROBLEM # 7 (12 points)

Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it. Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month. The cash flows from each of the businesses have approximately the same amount of risk. The business names, square footage requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall are provided below:

Business Name Square Feet Required Expected Monthly Cash Flow
30 1/2 Flavors 1,500 28,500
Gords Gym 3,500 52,500
Pizza Warehouse 2,500 52,500
WalVerde Drugs 6,000 147,000
S-Mart 12,000 180,000
Super Clips 1,500 25,500
Videos Now 4,000 70,000
Multigular Wireless 1,000 22,250

Show calculations. For both answers, Resource consumed is the Sq Ft required / Total Sq Ft and PI is Expected Monthly Cash Flow / Resource Consumed / 100 (to get a percentage). Additionally, the stores selected as tenants were selected because they gave the most bang for the buck while completely utilizing the available space to ensure 100% occupancy.

a) If your new strip mall will have 15,000 square feet of retail space available to be leased, to which businesses should you lease and why?

b) If your new strip mall will have 16,000 square feet of retail space available to be leased, to which businesses should you lease and why?

https://brainmass.com/economics/balance-of-payments/finance-303211

Solution Summary

The solution explains some questions in finance relating to time value of money and capital budgeting

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