Assignment:
1. Critically discuss the advantages and disadvantages of each legal form of business organization.
2. Bob invested $2,000 in an investment fund on his 21st birthday. The fund pays 7% interest compounded semiannually. Bob is celebrating his 50th birthday today. Bob decides he wants to retire on his 60th birthday and he wants to withdraw $75,000 per year, the first withdrawal on his 60th birthday and the last withdrawal on his 90th birthday. Bob expects to receive $100,000 from his employer on his 55th birthday in recognition of his long service to the company. Assume Bob has not taken any money out of his investment fund since he initially funded it on his 21st birthday, and that he will deposit the $100,000 from his employer into the investment fund on his 55th birthday. The investment fund will be used to pay for Bob's retirement.
a. If Bob makes no additional deposits into his investment fund, how much will be available for retirement at age 60?
b. Since the amount in (a) is insufficient to meet his retirement goals, Bob decides to deposit equal annual amounts into the investment fund beginning on his 51st
birthday and ending on his 59th birthday, so that he can meet his retirement goals. How much will each deposit be?
3. Financial Statements reflect the effects of business transactions and events on the entity. The different types of financial statements are not isolated from one another but are closely related to one another. Critically discuss the relationship and links among different financial statements.
4. Why do we focus on cash flows rather than accounting profits in making our capital budgeting decisions? Why are we interested only in incremental cash flows rather than total cash flows?
5. Premium Pie Company needs to purchase a new baking oven to replace an older oven that requires too much energy to run. The industrial size oven will cost $1,200,000. The oven will be depreciated on a straight-line basis over its six-year useful life. The old oven cost the company $800,000 just four years ago. The old oven is being depreciated on a straight-line basis over its expected ten-year useful life. (That is, the old oven is expected to last six more years if it is not replaced now.) Due to changes in fuel costs, the old oven may only be sold today for $100,000. The new oven will allow the company to expand, increasing sales by $300,000 per year. Expenses will also decrease by $50,000 per year due to the more energy efficient design of the new oven. Premium Pie Company is in the 40% marginal tax bracket and has a required rate of return of 10%.
a. Calculate the net present value and internal rate of return of replacing the existing machine
b. Explain the impact on NPV of the following:
i. Required rate of return increases
ii. Operating costs of new machine are increased
iii. Existing machine sold for less