1.    (20 points) You are offered a zero coupon bond worth $10,000 in face value 20 years from now. Assume that you believe inflation over this time period would average 1.25% per year and that you believe the stock market might yield a 10% per year return, but would also have a 6.25% risk premium over this bond. What price would you be willing to pay for this bond today?

 

 

 

2.    (20 points) You look over the balance sheet for your company and see the following key figures:

Assets: $ 6,000,000

Liabilities: $ 2,000,000

Inventory: $ 4,000,000

Sales per year: $ 3,650,000

Accounts Receivable: $ 1,000,000

Based on the Inventory-Turnover Ratio, the Current Ratio, the Quick Ratio, and the DSO Ratio, how well would you say the business is doing?

 

 

Is there any particular group or groups in the organization that need to be yelled at for not doing a better job? Sales? Marketing? Engineering? Production? Accounting? Who, if any, and why.

 


 

3.    (20 points) You purchase a building lot for $30,000 and build a $110,000 duplex apartment on it. You paid cash for the lot, the bank wouldn’t give you a loan to buy land. However, they are willing to waive the down payment requirement for the building loan, based on the land as security. You take out a 10 year loan at an APR of 5.5%

What is your monthly loan payment? What is your yearly loan payment?

What is your yearly depreciation? What is the book value of the property at the end of ten years?

Assume that real estate taxes are $5,000 per year and fire insurance costs $1,000 per year. Also assume the property is occupied 87% of the time. What is the minimum you believe you need to charge for rent, and why that amount?

Assume you sell the property at the end of ten years for a net price of $156,650, what is your capital gain on the sale, subject to income tax? If your capital gain tax rate is 20%, how much tax do you owe? How much do you have left after taxes? What was the annual percentage yield of this investment over the 10 years you owned it? (consider what you invested and what you earned on that investment)

 

 

 

 

 

 

 

 

 

 

 

 

4.    (20 points) You bought a truck three years ago for $150,000. You took out a 5 year loan at 4% and you assumed the salvage value at the end of 10 years would be $25,000. The yearly operating costs for fuel, maintenance, licensing, etc. is $86,000.

 

Today, you have the opportunity to buy a new truck for $160,000 using another 5 year loan at 4.5%, and assuming the salvage value 7 years from now would be $55,000. The new truck gets much better gas mileage and the operating costs would be only $66,000 per year.

 

Neglecting calculations for depreciation or trade-in value, should you drive the truck you have for another 7 years, or buy the new truck? Assume your company MARR=12%.


 

5.    (20 points) Your town has a proposal to install solar panels on the roof of the combined City Hall-Police Station-Fire Station building. The offer is to install a 10 kW system for $30,000 and it would be financed by the installing company for 10 years at 4% APR. It would deliver, on average, 100 kW-hr per day of electricity. Electricity currently costs $0.08 per kW-hr and the city uses 6% as the discount rate for financial decisions.

Using Benefit-Cost analysis, should the city accept this proposal?

The installer then offers to install even more solar panels such that for an additional $10,000 you would get an additional 75 kW-hr per day of electricity.

Using Benefit-Cost analysis, should the city accept this new proposal?

 

 

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