4.) Your business group is looking into the opportunity to invest in a small sea
ID: 2642584 • Letter: 4
Question
4.) Your business group is looking into the opportunity to invest in a small seaside resort with a good track record and a remaining service life of 25 years. The initial investment would be $2,000,000. The room rental income is estimated to be $500,000 per year for the first five years. Then the rental income will increase by 11% for every five-year interval over the remaining service life of this asset. The estimate for your operating expenses, including taxes, will be $200,000 the first year, and then they will increase by $12,000 each year thereafter. The real estate agency tells you that razing the resort and selling the lot after 25 years will net you $90,000. At what interest rate would your business group be indifferent towards acquiring this resort?A) 11.51%
B) 10.60%
C) 13.33%
D) 12.42%
5.
A company wants to invest into a new production process and is trying to determine the necessary investment amount. They will be using the process for five years, and it is expected to generate yearly net cash flows of $8,400. The process is used 2,000 hours per year, and the hourly savings are expected to be $0.44. Assume an interest rate of 8%. What amount of initial investment is needed to satisfy the above requirements?
A) $30,025
B) $29,604
C) $38,105
D) $32,752
6.
Consider the following financial data for a project: $90,000 is the initial investment, $10,000 is the salvage value, 6 years is the service life, $27,000 is the annual revenue, and $8,000 are the annual expenses. Answer the following questions: a) What is the i* for this project? b) If the annual expense increases at a 7% rate over the previous year's expenses, but the annual income is unchanged, what is the new i*? c) In part (b), at what annual rate will the annual income have to increase to maintain the same i* obtained in part (a)?
A) a) 8.35%, b) 6.84%, c) 3.16%
B) a) 10.27%, b) 8.35%, c) 2.92%
C) a) 9.42%, b) 7.15%, c) 2.20%
D) a) 9.88%, b) 7.46%, c) 2.62%
PLEASE SOLVE OUT I AM SO LOST
Explanation / Answer
4. C) 13.33%
5. B) ) $29,604
6. C) a) 9.42%, b) 7.15%, c) 2.20%
Year Investment Income Expense Residual Net Income PVF @10% PVF @15% PV 0 -$2,000,000.00 $0.00 -$2,000,000.00 1 1 -$2,000,000.00 -$2,000,000.00 1 $500,000.00 $200,000.00 $500,000.00 0.909091 0.869565 $454,545.45 $434,782.61 2 $500,000.00 $212,000.00 $288,000.00 0.826446 0.756144 $238,016.53 $217,769.38 3 $500,000.00 $224,000.00 $276,000.00 0.751315 0.657516 $207,362.89 $181,474.48 4 $500,000.00 $236,000.00 $264,000.00 0.683013 0.571753 $180,315.55 $150,942.86 5 $500,000.00 $248,000.00 $252,000.00 0.620921 0.497177 $156,472.17 $125,288.54 6 $555,000.00 $260,000.00 $295,000.00 0.564474 0.432328 $166,519.81 $127,536.64 7 $555,000.00 $272,000.00 $283,000.00 0.513158 0.375937 $145,223.75 $106,390.18 8 $555,000.00 $284,000.00 $271,000.00 0.466507 0.326902 $126,423.50 $88,590.38 9 $555,000.00 $296,000.00 $259,000.00 0.424098 0.284262 $109,841.28 $73,623.96 10 $555,000.00 $308,000.00 $247,000.00 0.385543 0.247185 $95,229.19 $61,054.62 11 $616,050.00 $320,000.00 $296,050.00 0.350494 0.214943 $103,763.72 $63,633.94 12 $616,050.00 $332,000.00 $284,050.00 0.318631 0.186907 $90,507.08 $53,090.98 13 $616,050.00 $344,000.00 $272,050.00 0.289664 0.162528 $78,803.19 $44,215.73 14 $616,050.00 $356,000.00 $260,050.00 0.263331 0.141329 $68,479.29 $36,752.52 15 $616,050.00 $368,000.00 $248,050.00 0.239392 0.122894 $59,381.20 $30,483.98 16 $683,815.50 $380,000.00 $303,815.50 0.217629 0.106865 $66,119.10 $32,467.17 17 $683,815.50 $392,000.00 $291,815.50 0.197845 0.092926 $57,734.14 $27,117.21 18 $683,815.50 $404,000.00 $279,815.50 0.179859 0.080805 $50,327.28 $22,610.52 19 $683,815.50 $416,000.00 $267,815.50 0.163508 0.070265 $43,789.97 $18,818.14 20 $683,815.50 $428,000.00 $255,815.50 0.148644 0.0611 $38,025.34 $15,630.40 21 $759,035.21 $440,000.00 $319,035.21 0.135131 0.053131 $43,111.41 $16,950.56 22 $759,035.21 $452,000.00 $307,035.21 0.122846 0.046201 $37,718.04 $14,185.21 23 $759,035.21 $464,000.00 $295,035.21 0.111678 0.040174 $32,948.99 $11,852.87 24 $759,035.21 $476,000.00 $283,035.21 0.101526 0.034934 $28,735.32 $9,887.63 25 $759,035.21 $488,000.00 $90,000.00 $361,035.21 0.092296 0.030378 $33,322.10 $10,967.40 NPV $712,716.31 -$23,882.09Related Questions
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