Question 1. You expect to retire in 15 years. Based on your projections, you believe you can afford to put away $1,000 per month over that time. How much will you have at retirement?
After retirement you expect to live for another 20 years, if you already had $200,000 in your account when you started putting away the $1,000 per month, how much would you be able to withdraw each month in retirement?
Assume the current interest rate is 5% and will be 5% when you retire.
Question 2. Cindy Legal was offered three contracts from three different law firms. Which should she choose? Assume the current rate is 4%.
Law firm A Law firm B Law firm C
Terms (in years) 3 4 5
Annual payment $250,000 $200,000 $170,000
Signing Bonus $150,000 $140,000 $100,000
Question 3. What is the value of a Microsoft bond with a coupon rate of 7% and 6 years left to maturity when the YTM is 5%?
If the YTM rises to 8%, will the value of the bond be greater than Par, less than Par, or equal to Par?
Question 4. The following two projects are being considered by XYZ Manufacturing:
Project A
A new machine to manufacture a new product that will cost $150,000 and the following cash stream:
Year 1 Year 2 Year 3 Year 4 Year 5
$35,000 $47,000 $53,000 $65,000 $82,000
Project B
A new marketing plan for their old product that will cost $75,000 to initiate and will return the following cash stream:
Year 1 Year 2 Year 3 Year 4 Year 5
$10,000 $16,000 $25,000 $31,000 $34,000
What is the NPV for each project?
What is the Payback Period for each project?
What is the Profitability Index for each project?
Draw the Net Present Value Profile for each project. Identify the indifference point.
Which project should be chosen?
Assume the WACC is 6%.