FIN 301 Case 2

FIN 301 Case 2

 

 

Part I:

Question A.

Worth of the bank in one year: $15,000

Interest rate paid by the bank 7%

Calculation of the present value at the rate of 7%and 4% will be as follows;

PV at the rate of 7% will be;
$15,000/1.07=$ 14018.69
PV at the rate of  4%  is calculated as follows;
$15,000/1.07=$ 14423.08
Question B.

The back is supposed to have two accounts, namely Account A and Account B.

Account A is expected to be worth $6, 500 in one years time, while Account B is expected to be worth $12, 000 in 2 years time. The accounts are expected to earn an interest of 6% per annum. Therefore, the present values of the two accounts can be presented as follows;

Account A
$6,500.00 /1.06=$6,132.08

The present value is =$6,132.08

On the other hand, the present value of Account B is presented as follows;
$12,600.00 /1.062=$11,886.79

The present value is =$11,886.79
Question C.: Inheritance of a goldmine with a three years worth of gold deposit

Projected earnings from the gold mine are provided as follows

Year 1: $49,000,000
Year 2: $61,000,000
Year 3: $85,000,000

1. a) The present value of the stream of income at 7% discount rate
   $49,000,000/(1.07)+ $61,000,000/(1.07)2+$85,000,000/(1.07)3=$168,459,474.48
   $45,794,392.52 + $53,279,762.42 + $69,385,319.54
   b) The present value of the stream of income at 5% and 3% discount rate is calculated as follows.

At %5 discount rate,
$49,000,000/(1.05)+$61,000,000/(1.05)2+$85,000,000/(1.05)3=$175,421,660.73
$46,666,666.67 + $55,328,798.19 + $73,426,195.88
At %3 discount rate
$49,000,000/(1.03)+$61,000,000/(1.03)2+$85,000,000/(1.03)3=$182,858,207.04
$47,572,815.53 + $57,498,350.46 + $77,787,041.05
Comparison of the Results

It is true that the risk high when the discount rate is high and vice versa (Smart and Graham, 2011). The present value, when the discount rate is high (7%) is low at $168,459,474.48. When the discount rate is lowered to 5%, the PV goes up to =$175,421,660.73 When the discount rate is low (3%), the PV of the goldmine is high at $182,858,207.04. Therefore, the PV of the goldmine is worth more today at a low rate of discount compared to the highest discount rate while marinating the same stream of income for the next three years (Presanna, 2009).

Part II

The high risk to investors can be calculated in the following way.

• Ice Dreams Shaved Ice Beverage Business; low risk venture that requires a low discount rate
• RJ Wagner and Assoc. Realty Real Estate Brokerage Business is a high risk initiative that enquires a high discount rate
• Interstate Travel Centre; is a medium risk venture and requires a medium discount rate

Ice Dreams Shaved Ice Beverage Business

The Ice Dreams Shaved Ice Beverage Business has a strong marketing plan. However, the venture provides a low discount rate for the low risk business. The chance of succeeding in the business is extremely high. This is based on the low cost of doing business as can be seen form the low cost of inventories, salary of the employee and advertising as well. The low cost of the product means it can be sold at a reasonable price, while keeping the margin somehow higher (Smart and Graham, 2011). For instance, the cost of Flavoured shave ice is 19 cents. The price is $1. The economy does not usually affect sales of comfort foods such as snack. Therefore, the product can remain relatively stable for some years. Since the shave ices do not cost much, they can provide much relief during times of deep economic challenges (Rose, 2009). Although this venture runs at low costs, it will also have low profits as opposed to the other businesses considered in this discussion.

The net profit for the company is as flows’
Year 1=$14,659,

Year 2=$28,595

Year 3=$43,315

The company has only one employee. This means profits will go to the owner of the business. At the promotional initiatives will be low at $500. In addition, with the focus on community engagements, the company is expected to have loyal customers that will continually flock its premises for more products.
RJ Wagner and Assoc. Realty Real Estate Brokerage Business

This business is much dependent on the performance of the economy. The housing sector has been doing badly in the last 5 years. Foreclosures are all over. Unemployment, which was fuelled by global financial crisis, has made things worse and not many people are seeking homes. In the marketing plan, a salary of about $80,000 for each house agent seems optimistic. The average wage earnings in 2008 were about $ 40,000. With fewer and fewer people seeking homes, brokerage business looks bleak.

A major strength for this business is the incentive provided to customers. There are start up costs that require les borrowing (Smart and Graham, 2011). In addition, the owner had a wealth of experience in the sector and was willing to pay good rates to any of the hired agents. In addition, the owner provided training to the agents (Heisinger, 2009). However, this plan seems costly and hence risky because of its dependence on the market, agents, and their level of expertise. There is also the issue of the willingness of buyers and sellers in the sector. The proprietor is also optimistic of getting aggressive sales and profits in the first three years. If the plan goes on well, investors can be guaranteed of a high discount rate.
Interstate Travel Centre Truck Stop Business

The Interstate Travel Centre Truck Stop Business has a higher chance of doing well in the industry. Therefore, the business can be assumed to have a moderate risk. This provides investors with a moderate rate of discount (Smart and Graham, 2011). This model of business provides more service and convenience for shoppers because various products can be found ‘under one roof.’ Therefore, customers can get more than they are looking for within the premises. People desire to get more for less. Convenience, saving on time, and avoiding more fuel consumption are critical in today’s fast-phased world. Gas stations make profits from the sales of products found within the stores, which generate more profits than gas. Fuel generates about 30% of service stations’ profits (Heisinger, 2009). The profit is distributed among several players including the county government, city, and oil companies.

Interstate Travel Centre Truck Stop Business has bigger operations than the other two businesses. The company has many employees compared to the other companies. In addition, the business operations are complex in comparison. The management have a greater dependence on the employees because of the increased business operations (Presanna, 2011). Employees are therefore expected to be successful in their areas of operations, including gas sales. The employees are expected to create convenience of customers as they go about buying products. Although the sales volumes surpass the other companies, the profits of the business are relatively lower than the other ventures.

References

Heisinger, K. (2009).Essentials of Managerial Accounting. London: engage Learning.

Presanna, C (2009).Projects 7/E. New Delhi: Tata McGraw-Hill Education

Presanna, C (2011). Financial Management. New Delhi: Tata McGraw-Hill Education

Smart, B. S. and Graham, R. J. (2011). Introduction to Corporate Finance: what companies do. London:Cengage Learning.

 

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