Use the portfolio technique to analyze the following choices. Using future as th
ID: 2721618 • Letter: U
Question
Use the portfolio technique to analyze the following choices. Using future as the criteria use the portfolio technique to choose between A Certificate of Deposit with a return of 6% per year which must be held for 8 years. A Passbook Saving Account which can be added to at any time is available at a 3% per year interest rate (not a standalone choice). Investment A, Initial Cost 500,000. Increased Net Revenue 400.000 per year each year for 8 years. Salvage Value 30,000 at 8 years. Investment B, Initial Cost 400.000. Increased Net Revenue 350,000 per year each year for 8 years. Salvage Value 20,000 at 8 years. Total Capital 800,000. All funds not used in initial investment put into Certificate of Deposit. Passbook savings receives cash flow funds as normal for portfolio technique.Explanation / Answer
a. The future value of 800,000 for 8 years at 6% p.a is calculated using the FV formula in excel as in =fv(rate,nper,pmt,pv) where nper =8,rate =0.06, pmt=0 and pv=800,000.
Hence the future value =fv(0.06,8,0,800000) = $1,275,078.46
b. We are not evaluating (b) since it is not a standalone choice
c. Investment A has inital cost of 500,000. This will be give a revenue of 400,000 for 8 years = 400,000* 8 = 3,200,000. The salavge value = 30,000 . So total worth = 3,200,000 - 500,000 + 30,000 = 2,730,000
The 300,000 (800,000 - 500,000) of the remainder capital will be put into CD with 6% p.a The future value will be =fv(0.06,8,0,300000) = 478,154.42
Hence total value = 2,730,000 + 478,154.42 = 3,188,154.42
d. Investment B has inital cost of 400,000. This will be give a revenue of 350,000 for 8 years = 350,000* 8 = 2,800,000. The salavge value = 20,000 . So total worth = 2,800,000 - 400,000 + 20,000 = 2,420,000
The 400,000 (800,000 - 400,000) of the remainder capital will be put into CD with 6% p.a The future value will be =fv(0.06,8,0,400000) = 637,539.23
Hence total value = 2,420,000 + 637,539.23 = 3,057,539.23
Conclusion: Best option is (c) which is to invest 500,000 in the Investment and 300,000 in a certificate of deposit
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