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BF2244: Strategic Finance - Worksheet Two: (Lectures: Weeks 3 & 4) (Friday Sessions: Weeks 4 & 5)

This document contains a worksheet with questions about strategic finance concepts such as: 1) Calculating the amount needed to save today to cover a future expense based on an interest rate. 2) Determining the implied interest rate of a loan where the amount paid back is double the amount borrowed. 3) Choosing the best option for receiving a prize based on its present value. 4) Calculating the present value of a series of future annual payments. 5) Identifying the best projects to accept based on various criteria like payback period, NPV, and IRR. 6) Determining which cash flows should be included in an investment decision.

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Aniket Mehta
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117 views

BF2244: Strategic Finance - Worksheet Two: (Lectures: Weeks 3 & 4) (Friday Sessions: Weeks 4 & 5)

This document contains a worksheet with questions about strategic finance concepts such as: 1) Calculating the amount needed to save today to cover a future expense based on an interest rate. 2) Determining the implied interest rate of a loan where the amount paid back is double the amount borrowed. 3) Choosing the best option for receiving a prize based on its present value. 4) Calculating the present value of a series of future annual payments. 5) Identifying the best projects to accept based on various criteria like payback period, NPV, and IRR. 6) Determining which cash flows should be included in an investment decision.

Uploaded by

Aniket Mehta
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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BF2244: Strategic Finance Worksheet Two

(Lectures: Weeks 3 & 4) (Friday Sessions: Weeks 4 & 5)


1. You can save at a rate of 9.5% and will need 5000 to pay for your wedding in 3 years time. How much would you have to save today to cover this? 2. What is the implied interest on a 5 year loan where you have to pay back double the amount you borrow? 3. You have won a competition and can choose how you take your prize. Which option would you prefer? Assume an interest rate of 7%. a. b. c. d. 1000 today 1300 in three years 140 a year for 10 years (first payment in one year) 75 a year forever (first payment in one year)

4. Suppose that you will receive annual payments of 10,000 for a period of 10 years. The first payment will be made four years from now. If the interest rate is 5%, what is the present value of these payments? Consider the following four projects and associated cash flows.
Project A B C D 0 -110 -140 -140 -120 Time of cash flow 1 2 50 45 55 55 100 60 15 105

3 50 55 15 50

5. Given a cost of capital of 10% and a target payback period of 2 years. Which of the above projects would be accepted using each of the payback, discounted payback, NPV and IRR techniques? 6. If the four projects are mutually exclusive which one would you accept in the absence of any capital rationing? 7. If the projects are fully divisible, and you only had 300 to invest which projects would you pick? What would be the total value added to shareholders? 8. Which projects would you pick if they were not divisible? 9. Which of the following cash flows should be included in the investment decision of whether or not to launch a new style rubber moulded steering wheel? a. b. c. d. e. The 1/100th of the CEO salary that is allocated to all new projects The cost of the rubber that has already been bought and is being held in stock The 1m of the market research that indicated the project seemed viable 1/5th of current telephone rental as the new project would occupy 20% of office space Tax savings resulting from depreciating a new moulding machine that would be bought

Optional Challenge Question 10. A savings company is launching a new scheme with the slogan Pay us 100 a year for ten years starting today and 12 months after your last payment to us, we will start paying you 100 a year forever! What would the interest rate have to be to make this a fair deal?

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