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Problem 1 You have just inherited a large sum of money and you are trying to determine how much

you should save for retirement and how much you can spend now. For retirement, you want to invest a lump sum today (1 January 2005) in an investment account and expect to earn a return of 10% compounded annually. You do not intend to access these funds until you retire in five years from now (1 January 2010). You expect to live for 20 years following retirement. During your retirement you would like to receive income of P50,000 per year over twenty years, to be received on the first day of each year, with the first payment being on 1 January 2010. Complicating this objective is your desire to have one final three year fling during which time you intend to cycle (very slowly) around the country. To finance this you want to receive P250,000 on 1 January 2025, and because you will be on the road, receive no other payments on 1 January 2026 and 1 January 2027 (you do not wish to receive the P50,000 annual payment corresponding to these periods). In addition, as a final gesture, you would like to have P100,000 to donate to the nurses in your twilight nursing home on 31 December 2029.1 Required 1. At the investment rate of 10%, what lump sum would you need to deposit in the investment account in order to achieve your objectives? 2. How does your answer to (1) change in the investment rate is 5% compounded annually? 3. Rather than invest a lump sum today, suppose you instead decide to invest five annual cash flows in the investment account, with the first cash flow beginning immediately (1 January 2005). At the investment rate of 10%, what would be the annual amount that you would need to invest to achieve your objectives? 4. Suppose that to your horror, you realized you have not taken inflation into your calculations. How do your answers to (1) and (3) change if the your cash flow objectives represent real cash flows, but the discount rate of 10% is a nominal rate and the inflation rate is expected to be 3% per annum?

Problem 2
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This problem is intended to give you an idea on how to plan for your retirement. It is very good to figure out your personal financial plan.

You have been presented with the following investment proposal. The firm is considering investing in a new product. The product is estimated to have a life of five years, after which it is expected to be scrapped since sales are expected to fall away as it loses popularity. The product requires an initial investment of P14 million in equipment, which has a depreciable life of seven years. The firm will sell the equipment after five years, and industry experts advise that it will have a salvage value of P2 million in five years. The firm uses straight line depreciation to a zero book value over the depreciable life of the asset. The estimated sales pattern is 40,000 units for year one, 100,000 units for year two, 150,000 for year three, 90,000 for year four and 60,000 for year five. The sales price per unit will be P300 for years one to four and P260 in year five. The cost of sales will be P220 per unit per year. The firm currently carries annual overhead expenses of P17.5 million, and these are expected to be P19 million per year if the new product is introduced. The product will also require the firm to invest in working capital: receivables and inventory. There will be an initial requirement of P100,000 just to get the project underway. After that, extra investment will be necessary to bring the total of working capital up to 10% of the estimated sales for the year. Working capital may decrease in some years. The final amount of working capital outstanding at the end of year five will be recovered*. All cash flows occur at the end of the year unless otherwise indicated. The required rate of return is 15% after tax. The company tax rate is 30% and taxes are paid as soon as the tax liability is incurred. The firm expects to be earning profits from other activities. Inflation is expected to be zero. Required 1. What is the net present value of the proposal? Should the new product be implemented? 2. Suppose the sales estimates were presented to you by an enthusiastic marketing team, keen to get the product into the market. History shows it would be useful to reduce their sales estimated by about 5%. What is the impact on the net present value of the project? Hint: *The investment in working capital is the incremental investment required to keep the working capital at 10% of revenues.

Problem 3

Deranged Limited must choose from the following two projects. When each project reaches maturity, it is expected to be replaced with an identical project in terms of risk and cash flow characteristics. Project Nova has a three year life and requires an initial outlay of P150,000. This is fully depreciable to a zero book value over three years, and has an expected salvage value of P25,460. The project is expected to generate revenue of P220,000 per year and incur cash expenses of P132,000 per year. Project Radenska has a seven year life and requires an initial outlay of P315,000. This is fully depreciable to a zero book value over seven years, and has an expected salvage value of P38,900. The project is expected to generate revenue of P250,000 per year and incur cash expenses of P150,000 per year. The required rate of return is 10%. All cash flows occur at the end of the period, unless otherwise stated. The corporate tax rate is 30% and taxes are paid as soon as any tax liability is incurred. The inflation rate is expected to be zero. Required 1. Rank the projects in terms of net present value, accounting rate of return, internal rate of return and payback period. 2. Which project should be selected? Why?

Direction: It should be answered and written in freehand. Show all the calculations. Show the cash flow diagrams of each problem. All answers must be summarized. Used short bond paper for this assignment. Avoid erasures if necessary. Use black ink only. Staple this together with the front page with ECE and PLP logo. Submit this on 14 October 2011 before 8:00 pm in our engineering office. Not complying with the abovementioned will suffer arthritis and tooth ache even if you dont have.. be guided accordingly.