FACULTY OF MANAMENT AND FINANCE UNIVERSITY OF RUHUNA

FINANCIAL MANAGEMENT MBA 201

GROUP ASSIGNMENT

Group 1
L.C.A.Pushpakumara P.L.Kodituwakku Gayani Jalathge P.G.G.Chinthaka Samith Kumara PDBA/MBA 277 PDBA/MBA 287 PDBA/MBA 278 PDBA/MBA 284

Question 01 A first-round draft choice quarterback has been signed to a three-year, $25 million contract. The details provide for an immediate cash bonus of $2 million. The player is to receive $5 million in salary at the end of the first year, $8 million in the next, and $10 million at the end of the last year. Assuming a 15 percent discount rate, is this package worth $ 25 million? If not, how much is it worth? Answer This contract is not worth $ 25 million as cash receipt is happening in different times. Calculation of present value of future cash flows using 15% discount rate.
0 1 $2 mn $5 mn 2.00 4.35 51/1.15 6.05 6.58 18.97 2 $8 mn 3 $10 mn time line

81/(1.15) 2 101/(1.15) 3

The contract is $18.97 million worth Question 02 You plan to make a series of deposits in an individual retirement account. You will deposit $1,000 today, $2,000 in two years, and $2,000 in five years. If you withdraw $1,500 in three years and $1,000 in seven years, assuming no withdrawal penalties, how much will you have after eight years if the interest rate is 7 percent? What is the present value of these cash flows? Answer Calculation of future value of cash flows after eight years
Year 0 1 2 3 4 5 6 7 8 Cash flow FVIF7%
8

FV 1718.19 3001.46 -2103.83 2450.09 -1070.00 3995.91

1000 (1+.07) 2000 (1+.07)

-1500 (1+.07)5 2000 (1+.07)3 -1000 (1+.07)1

Future value of cash flows after eight years = $3995.91

Calculation of present value of cash flows PV PV PV = FV81/ (1+r) ^8 = $3995.911/(1+.07)^8 = $2325.65

Question 03 You are looking into an investment that will pay you $12,000 per year for the next 10 years. If you require a 15 percent return, what is the most you would pay for this investment? Answer The most we are prepared to pay for this investment is the present value of future cash inflows at 15% discount rate or in other words NPVat 15% = 0 PV = C/r(1- 1/(1+r)n) PV = 12000/0.15(1-1/(1+0.15)10) PV = $60225.22

Question 04 The going rate on students loans is quoted as 8 percent APR. The terms of the loans call for monthly payments. What is the effective annual rate (EAR) on such a student loan? Answer EAR = (1+EPR/12)12 - 1 EAR = (1+0.08/12)12 - 1 EAR = 0.08299 EAR = 8.3%

Question 05 Suppose you borrow $10,000. You are going to repay the loan by making equal annual payments for five years. The interest rate on the loan is 14 percent per year. Prepare an amortization schedule for the loan. How much interest will you pay over the life of the loan?

Answer Calculation of annual installment of the loan PV = C/r( 1 1/(1+r)n) 10000 = C/0.14( 1- 1/(1+0.14)5) C = 2912.84 Amortization schedule for the loan

Year

Openning Interest Payment Closing balance capital balance Component component 1 $10,000.00 $1,400.00 $2,912.84 $1,512.84 $8,487.16
2 3 4 5 $8,487.16 $6,762.52 $4,796.44 $2,555.10 $1,188.20 $946.75 $671.50 $357.71 $4,564.17 $2,912.84 $2,912.84 $2,912.84 $2,912.84 $1,724.64 $1,966.09 $2,241.34 $2,555.13 $6,762.52 $4,796.44 $2,555.10

Total interest payment for the loan = $4564.17

Question 06 Youve recently finished your MBA at the Darnit School. Naturally, you must purchase a new BMW immediately. The car costs about $21,000. The bank quotes an interest rate of 15 percent APR for a 72-month loan with a 10 percent down payment, You plan on trading the car in for a new one in two years. What will your monthly payment be? What is the effective interest rate on the loan? What will the loan balance be when you trade car in? Answer Down payment = 10% of $21000 = $2100 Present value of 72 monthly installments = $18900 Calculation of monthly installment PV = C/r( 1 1/(1+r)n) here r = APR/12, n = 72 18900 = C/0.15/12 (1- 1/ (1+0.15/12)72 ) C = $399.64 Monthly installment = $399.64

EAR = (1+APR/12)12 - 1 EAR = (1+0.15/12)12 - 1 EAR = 0.1607 = 16.07% If the car is traded in after two years, loan balance at the end of two year could be calculated in two ways. One way is to prepare a loan amortization schedule and take the closing balance at the end of the second year year. But the easiest method is to calculate the present value of remaining 48 installments. PV = C/r (1 1/ (1+r) n) PV = 399.64/0.15/12 (1 1/ (1+0.15/12)48) PV = $14359.65 Loan balance after two years = $14359.65