Saulsberry N MBA504 Assignment 2

Topics: Investment, Rate of return, Long Beach City College Pages: 6 (797 words) Published: April 21, 2015


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Application for Admission




Zachary Saulsberry


3943 E. 4th Street

Long Beach

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Jones International University
MBA504-Managerial Finance
Nancy Saulsberry

Warm-up Exercises
E5-1Assume a firm makes a $2,500 deposit into its money market account. If this account is currently paying 0.7% (yes, that’s right, less than 1%), what will the account balance be after 1 year? $2,500 X 1.007 = $ 2,517.50 will be the balance after 1 year

E5-2If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit this amount into an account that pays 2% annual interest, compounded monthly, what will the account balance be after 4 years?

$ 1,260.00 + $ 975.00 = $ 2,235.00

48 months compounded monthly at 2%
PV = 2235.00
R = 2%
N = 4 years
M = 12
PV4 = 2,235.00 X (1 + .02/12)12 X 4
$ 2,420.98

E5-3Gabrielle just won $2.5 million in the state lottery. She is given the option of receiving a total of $1.3 million now, or she can elect to be paid $100,000 at the end of each of the next 25 years. If Gabrielle can earn 5% annually on her investments, from a strict economic point of view which option should she take?

The $ 100,000 paid annually at the end of each of the next 25 years is the better option.
PV n = (CF/r) X [1- 1/(1+r)n]
= $1,409,394.457

E5-4Your firm has the option of making an investment in new software that will cost $130,000 today and is estimated to provide the savings shown in the following table over its 5-year life:

Savings Estimate

Should the firm make this investment if it requires a minimum annual return of 9% on all investments?
130,000 X (1+.09)5 =$ 206,005.82
Yes the firm is wise to choose this investment at this time based on the Future Value of the investment decision. The reason is that present value inflows is more than present value outflows.

E5-5Joseph is a friend of yours. He has plenty of money but little financial sense. He received a gift of $12,000 for his recent graduation and is looking for a bank in which to deposit the funds. Partners’ Savings Bank offers an account with an annual interest rate of 3% compounded semiannually, while Selwyn’s offers an account with a 2.75% annual interest rate compounded continuously. Calculate the value of the two accounts at the end of one year, and recommend to Joseph which account he should choose.

Using the compounding calculation
FVn = PV X (1 + 0.03/2)mXn
FV1= $12,000 X (1+0.03/2)2X1
Money deposited at Selwyn’s Savings Bank will earn annual interest at a rate of 2.75% compounded continuously. Joseph should go with Partners as it is a better return for his investment....
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