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Assignment 1

This document contains 6 questions for a finance assignment. Question 1 asks whether to lease or buy a car for $31,000 that can be resold for $20,000 in 3 years. It asks for the break-even resale price that would make the options indifferent. Question 2 involves calculating a settlement amount as a juror for lost wages, pain/suffering, and costs with a 9% interest rate. Questions 3-6 involve financial calculations for projects, a company, and tax implications of asset salvage value.

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Ibrahim Mansha
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19 views

Assignment 1

This document contains 6 questions for a finance assignment. Question 1 asks whether to lease or buy a car for $31,000 that can be resold for $20,000 in 3 years. It asks for the break-even resale price that would make the options indifferent. Question 2 involves calculating a settlement amount as a juror for lost wages, pain/suffering, and costs with a 9% interest rate. Questions 3-6 involve financial calculations for projects, a company, and tax implications of asset salvage value.

Uploaded by

Ibrahim Mansha
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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FINN 200

Assignment 1

Due Tuesday 31st January 2023

Question 1

After deciding to buy a new car, you can either lease the car or purchase it with a three-year loan. The car you
wish to buy costs $31,000. The dealer has a special leasing arrangement where you pay $1,500 today and $405
per month for the next three years. If you purchase the car, you will pay it off in monthly payments over the next
three years at an APR of 6 percent. You believe that you will be able to sell the car for $20,000 in three years.
Should you buy or lease the car? What break-even resale price in three years would make you indifferent
between buying and leasing?

Question 2

You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident.
In the trial, doctors testified that it will be five years before the plaintiff is able to return to work. The jury has
already decided in favor of the plaintiff. You are the foreperson of the jury and propose that the jury give the
plaintiff an award to cover the following: (1) The present value of two years’ back pay. The plaintiff’s annual
salary for the last two years would have been $37,000 and $39,000, respectively. (2) The present value of five
years’ future salary. You assume the salary will be $43,000 per year. (3) $150,000 for pain and suffering. (4)
$25,000 for court costs. Assume that the salary payments are equal amounts paid at the end of each month. If the
interest rate you choose is a 9 percent EAR, what is the size of the settlement? If you were the plaintiff, would
you like to see a higher or lower interest rate?

Question 3
Question 4

Sparkling Water, Inc., expects to sell 2.8 million bottles of drinking water each year in perpetuity. This year
each bottle will sell for $1.25 in real terms and will cost $.90 in real terms. Sales income and costs occur at year-
end. Revenues will rise at a real rate of 6 percent annually, while real costs will rise at a real rate of 5 percent
annually. The real discount rate is 10 percent. The corporate tax rate is 34 percent. What is Sparkling worth
today?

Question 5

Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set
the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even
level for the project. Guthrie Enterprises needs someone to supply it with 140,000 cartons of machine screws
per year to support its manufacturing needs over the next five years, and you’ve decided to bid on the contract.
It will cost you $1,800,000 to install the equipment necessary to start production; you’ll depreciate this cost
straight-line to zero over the project’s life. You estimate that in five years this equipment can be salvaged for
$150,000. Your fixed production costs will be $265,000 per year, and your variable production costs should be
$8.50 per carton. You also need an initial investment in net working capital of $130,000. If your tax rate is 35
percent and you require a 14 percent return on your investment, what bid price should you submit?

Question 6

An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an
acquisition cost of $7,100,000 and will be sold for $1,400,000 at the end of the project. If the tax rate is 35
percent, what is the aftertax salvage value of the asset?

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