"Cash is king." Donald Trump made this statement at the end of the 1980s, referring to the climate for real estate investment. Most people would agree that in life, cash is, indeed, king. The management and proper valuation of cash flows is the most important factor in the survival of a business. Almost all businesses receive cash payments in spurts but must make cash payments at regular intervals. Many businesses have failed not for a lack of sales success, but rather for a lack of timely cash. Therefore, the timing of cash flows and implied time value are of utmost importance.
In this assignment, you will evaluate scenarios involving your groupâs fictitious firm.
Your firm has a single copy machine for the tenth floor, and it has broken down yet again. Your firm must decide how to proceed in replacing the copier. So far, you have received two competing offers for comparable machines. Both offers are 3-year leases
Option A requires an up-front payment of $1,700 with additional annual payments of $1,200 at the beginning of years 2 and 3. The firm is also charged one-half of 1 cent, ($0.005), for each sheet printed, payable at the end of each year.
Option B has no up-front cost. Its lease payment is $1,300, payable at the beginning of the year, and the per-sheet charge is 1 cent ($0.01), payable at the end of each year. You estimate that monthly use of the copy machine will amount to 1,500 copies.
Determine an appropriate discount rate and discount the cash flows for each lease. Choose the best lease based on which lease costs less in present value terms. Be prepared to defend your choice.
A second option is to purchase the machine outright. In fact, after the lease expires, you are considering buying your firmâs next copier. (1) You need to obtain a minimum of two offers before buying a copy machine. Your needs include a multifunction machine capable of copying, faxing, and printing, with networking capability because all workers on the tenth floor will be sharing it. The purchase price should approximate the present value calculations from part a. In your search, you must consider not only the purchase price of the machine, but also the cost of any warranty/service agreement. In addition, you must adjust the current price for expected inflation. Take the price for the machine today and find out what the price will be in 3 years given a 3% compound annual inflation rate. Alternatively, you could calculate what the price would be given a 5% annual rate of decrease, as that is the observed trend over recent years. (2) Because you want to save for this expenditure (rather than take out a loan for it), you need information about savings rates at a local bank. (Here âbankâ refers to any depository institution, including those that are strictly online operations.) After getting a rate for a savings account, calculate what amount you would have to deposit today to have the dollar value of the machine you wish to buy at the end of 3 years. If, instead, you wanted to make annual deposits at the end of each of the next 3 years, how much should you deposit? What if those three equal deposits were made at the beginning of each year?
Your firm plans to upgrade its computer systems. The computers will be financed with a 5-year bank loan totaling $25,000. Your firm can obtain a loan at the prime rate and you are asked to provide this information to your firmâs management. Obtain this information from a local bank and use that interest rate to prepare an amortization schedule for the loan.
A recent court ruling concluded that a competitor had violated one of your patents without properly paying for its use. The court-ordered settlement provides the following annual payments to your firm:
Year Payment 1 $150,000 2 125,000 3 100,000 4 75,000 5 50,000
Find the present value of these cash flows using a 6% discount rate.
"Cash is king." Donald Trump made this statement at the end of the 1980s, referring to the climate for real estate investment. Most people would agree that in life, cash is, indeed, king. The management and proper valuation of cash flows is the most important factor in the survival of a business. Almost all businesses receive cash payments in spurts but must make cash payments at regular intervals. Many businesses have failed not for a lack of sales success, but rather for a lack of timely cash. Therefore, the timing of cash flows and implied time value are of utmost importance.
In this assignment, you will evaluate scenarios involving your groupâs fictitious firm.
Your firm has a single copy machine for the tenth floor, and it has broken down yet again. Your firm must decide how to proceed in replacing the copier. So far, you have received two competing offers for comparable machines. Both offers are 3-year leases
Option A requires an up-front payment of $1,700 with additional annual payments of $1,200 at the beginning of years 2 and 3. The firm is also charged one-half of 1 cent, ($0.005), for each sheet printed, payable at the end of each year.
Option B has no up-front cost. Its lease payment is $1,300, payable at the beginning of the year, and the per-sheet charge is 1 cent ($0.01), payable at the end of each year. You estimate that monthly use of the copy machine will amount to 1,500 copies.
Determine an appropriate discount rate and discount the cash flows for each lease. Choose the best lease based on which lease costs less in present value terms. Be prepared to defend your choice.
A second option is to purchase the machine outright. In fact, after the lease expires, you are considering buying your firmâs next copier. (1) You need to obtain a minimum of two offers before buying a copy machine. Your needs include a multifunction machine capable of copying, faxing, and printing, with networking capability because all workers on the tenth floor will be sharing it. The purchase price should approximate the present value calculations from part a. In your search, you must consider not only the purchase price of the machine, but also the cost of any warranty/service agreement. In addition, you must adjust the current price for expected inflation. Take the price for the machine today and find out what the price will be in 3 years given a 3% compound annual inflation rate. Alternatively, you could calculate what the price would be given a 5% annual rate of decrease, as that is the observed trend over recent years. (2) Because you want to save for this expenditure (rather than take out a loan for it), you need information about savings rates at a local bank. (Here âbankâ refers to any depository institution, including those that are strictly online operations.) After getting a rate for a savings account, calculate what amount you would have to deposit today to have the dollar value of the machine you wish to buy at the end of 3 years. If, instead, you wanted to make annual deposits at the end of each of the next 3 years, how much should you deposit? What if those three equal deposits were made at the beginning of each year?
Your firm plans to upgrade its computer systems. The computers will be financed with a 5-year bank loan totaling $25,000. Your firm can obtain a loan at the prime rate and you are asked to provide this information to your firmâs management. Obtain this information from a local bank and use that interest rate to prepare an amortization schedule for the loan.
A recent court ruling concluded that a competitor had violated one of your patents without properly paying for its use. The court-ordered settlement provides the following annual payments to your firm:
| Year | Payment |
|---|---|
| 1 | $150,000 |
| 2 | 125,000 |
| 3 | 100,000 |
| 4 | 75,000 |
| 5 | 50,000 |
Find the present value of these cash flows using a 6% discount rate.
