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Problem Set 04 - More Problems Using Financial Functions

1. The document provides 8 problems involving financial functions and calculations. The problems cover topics like investments, savings, loans, and business decisions. They require calculating future and present values using interest rates. 2. The problems ask the reader to determine amounts after a certain number of years of regular deposits and investments earning a given interest rate. They also ask whether various multi-year investments and business ventures would be profitable. 3. The financial calculations involve setting up models with functions like PV, FV, NPER and RATE to analyze scenarios like savings, loans, business cash flows and returns on investments.

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26 views

Problem Set 04 - More Problems Using Financial Functions

1. The document provides 8 problems involving financial functions and calculations. The problems cover topics like investments, savings, loans, and business decisions. They require calculating future and present values using interest rates. 2. The problems ask the reader to determine amounts after a certain number of years of regular deposits and investments earning a given interest rate. They also ask whether various multi-year investments and business ventures would be profitable. 3. The financial calculations involve setting up models with functions like PV, FV, NPER and RATE to analyze scenarios like savings, loans, business cash flows and returns on investments.

Uploaded by

Shashwat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Problem Set 04 – More Problems Using Financial Functions

1. My Investment Plan
I presently have $10,000 in the bank. At the beginning of each of the next 20 years,
I am going to invest $4,000 and I expect to earn 6 percent per year on my
investments. How much money will I have in 20 years?

2. Saving for College


You have begun saving for your child’s college education. You plan to save $5,000
per year and want to know for annual rates of return on your investment from 4
percent through 12 percent the amount of money you will have in the college fund
after saving for 10 –15 years.

3. Pragati AI
Mr. Naveen, founder of Pragati AI, expects his new AI-based product line to start
generating Rs. 70,000 in annual profit beginning one year from now. He expects this
level of annual profit will continue for the succeeding 5 years. Bringing the product
line on stream will require an up-front investment of Rs. 2,50,000. Naveen is
wondering whether this is the most productive way to invest that initial Rs. 2,50,000.
Help him. Would Pragati AI be better off investing it in something else? Jitu, co-
founder of Pragati AI, has another product option. In this case, they need to just
spend Rs. 1,00,000 initially and an annual profit of Rs. 18,000 each year will follow
over a period of 7 years. Should Pragati AI go for this second option, instead of the
first? Assume a rate of 10% in both cases.

4. Building a House
I am going to build a new house. I need to decide how much to borrow for building
the house. The repayment period is 15 years.
a. Determine how my monthly payments will depend on the amount borrowed and
the annual interest rate. You can assume a base case borrowing amount of $450,000
and interest rate of 5%.
b. If you can afford a monthly payment of $2000 per month, then how much can you
borrow?

5. Alice’s Retirement Plan


Alice wants to start planning for her retirement. She wants to decide how much she
needs to put aside every month. As a base case, she wants to determine how much
she will have saved for retirement by depositing $1000 per month, every month for
the next 30 years at a monthly interest rate of 0.6% per cent.
a. Build the base case spreadsheet model for Alice.
b. Build a one-way data table to evaluate the amount Alice will have saved for
retirement if she deposits the following amounts each month: $750, $1000, $1250,
$1500.
c. Build a horizontal one-way data table to evaluate the amount Alice will have saved
for retirement in the base case but with the savings interest rate being uncertain, with
the following possible values: 0.4%, 0.5%, 0.6%, 0.7%, 0.8%.
d. Build a two-way data table to evaluate how much Alice will have saved in 30
years at various monthly deposits (from $500 to $1500, in steps of $250) and the
interest rates (from 0.5% to 1.5%, in steps of 0.25%).
e. Build three scenarios as follows and evaluate the savings at the end of 30 years
for all three scenarios with the help of the scenario manager:

Interest Rate Deposit Amount


Scenario
Optimistic 1% $1500
Pessimistic 0.4% $750
Likely 0.5% $1000

6. NBA Player
An NBA player is to receive a $1,000,000 signing bonus today and $2,000,000 one
year, two years, and three years from now. Assuming r=0.10 and ignoring tax
considerations, would he be better off receiving $6,000,000 today?

7. Product Launch
Alice wants to decide whether a new consumer product should be launched. Based
on projected sales and costs, she expects that the cash flows over the five-year life
of the project will be $2,000 in the first two years, $4,000 in the next two, and $5,000
in the last year. It will cost about $10,000 to begin production. A 10 percent rate is
used to evaluate new products. Should Alice launch the product?

8. Investment in a Project
A project has a total up-front cost of $435.44. The cash flows are $100 in the first
year, $200 in the second year, and $300 in the third year. If rate is 18 percent, should
we take this investment?

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