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##### Lee plans to retire in 22 years with a nest egg of $8M.

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Homework Assignment I;1.;Lee plans to retire in 22 years with a nest egg of $8M. He has already saved $500,000 in an investment;account that generates a nominal rate of return of 12%, compounded quarterly. However, he needs to;withdraw $150,000 from this account in 10 years to finance his sons college education.;(a);Numerically show that whether Lees investment account balance will reach $8M in 22 years;based on the information provided above.;(b);The correct answer for part (a) indicates that Lees investment account will fall short of his;retirement goal of $8M in 22 years. Thus, he continues his pursuit by making additional fixed;contributions at the end of every quarter to the same investment account until he retires 22 years;later. How big should be his quarterly contribution in order to achieve his goal?;(c);Assume now that Lee retires and has $8M in his investment account. If he wants to leave $10M;to each of his two children upon his death after enjoying 25 years of retirement. What is the;maximum annual withdrawal from the investment account Lee can make at the beginning of;every year during his retirement?;2.;Maryanne, a baby boomer who turns 50 today, begins to save for retirement with $200,000 that she just;receives from a trust fund. She immediately invests this $200,000 in a stock fund. In addition, she;plans to contribute $10,000, $15,000, and $20,000, respectively, at the end of the next 3 years to the;same stock fund. The stock fund generates a nominal rate of return of 10%, compounded annually.;(a);What will be the value of her stock fund when she retires at the age of 67?;(b);Right after her retirement, she transfers her nest egg into a conservative investment that;compounds monthly. If Maryanne wants to withdraw a fixed monthly payment of $7,000 from;this investment indefinitely, what should be the annual rate of return of this conservative;investment?;3.;Consider the following two mutually exclusive projects, X and Y, and their cash flows information;Project;Year 0;Year 1;Year 2;Year 3;Year 4;X;($1,400);$350;$750;$650;$650;Y;($1,000);$300;$400;$500;$600;(a);Assume that the discount rate is 12%, compute the payback period, the IRR, NPV and PI of;project X.;(b);Use the McKinseys approach to compute the Modified IRR (MIRR) for project X.;(c);Apply the incremental IRR analysis to compute the crossover rate for projects X and Y, and select;between these two mutually exclusive projects.;4.;The following are two popular approaches used by automobile dealers;(a);Cash Rebate Versus Low Rate Dealer Financing;You are given two mutually exclusive options from the dealer on a $20,000 car: (i) $1,500 cash;rebate or (ii) 36-month low rate loan at 3% APR. The prevailing APR on 36-month auto loan;from a typical bank is 8%. Which option is a better deal?;(b);Buying Versus Leasing;You are interested in a $25,000 car. A simplified leasing contract includes the following: (i) upfront cost of $3,000, (ii) $400 monthly lease payment over a 36-month period, and (iii) purchase;cost of $12,000 at the end of the lease. What are the implied APR and EAR of the lease?;Should you lease the car or buy and finance the car with a loan from the bank in (a)?;5.;You have been asked by the president of your firm to evaluate the proposed acquisition of new;special-purpose equipment. The equipment's base price is $500,000, and another $50,000 for;its installation costs. The equipment falls into the MACRS 3-year class, and it will be sold at;the end of the projects 2-year life for $250,000. Use of the equipment will require net working;capital investment equivalent to 20% of the following years incremental revenues. The;equipment will increase annual revenues by $100,000, and save the firm $200,000 in annual;operating costs. The annual revenues and operating costs are expected to grow at an annual;rate of 10% during the 2nd-year of the project. This equipment will be placed in an unoccupied;site, which can otherwise be sold for $100,000 today. This site will be sold for the same price at;the termination of the project. The depreciation of this site that your firm owns can be ignored.;The firm's tax rate is 30 percent and the discount rate for the project is 12%.;(a);(b);(c);(d);6.;Compute the initial outlay of the project.;Compute the operating cash flows (OCF) in Years 1 and 2.;Compute the non-operating cash flows (i.e., capital spending and change in NWC) at the end of;Year 2.;What is your recommendation on this project according to the conceptually most correct capital;budgeting method? Why? Be concise!;Use the attached financial statements to compute;(a);the cash flow from assets and its 3 components;(b);the cash flow to creditors/bondholders and its 2 components;(c);the cash flow to stockholders and its 2 components;for LEE Corporation for the fiscal year of 2014.;LEE Corporation (Problem #6);Income Statement;2014;Net Sales;Cost of Goods Sold;Depreciation Expenses;Earnings Before Interest and Taxes;Interest Expenses;Taxable Income;Taxes (34%);Net Income;$ 1,800;$ 1,080;$ 180;$ 540;$ 120;$ 420;$ 143;$ 277;Dividends Paid;$ 83;Balance Sheet;2013;2014;Total Current Assets;Net Fixed Assets;Total Assets;$ 536;$ 2,164;$ 2,700;$ 540;$ 2,160;$ 2,700;Total Current Liabilities;Long-term Debt;Common Stock & Paid-in Capital;Retained Earnings;Total Liabilities and Equity;$ 980;$ 278;$ 700;$ 742;$ 2,700;$ 900;$ 180;$ 684;$ 936;$ 2,700;NOTES;This homework assignment is composed of a SAMPLE of past examination problems;that are pertaining to the midterm examination. Since this is just a sample, the actual;midterm examination may include other numerical problems that are not included in;this homework assignment, e.g., numerical problems from Chapter 3 and 6 such as;the use of the Pro Forma statement to estimate EFN, the EAC calculation;Financial Ratio calculations and interpretations, etc. As such, while you will find;this homework assignment a valuable tool for your preparation for the midterm;examination, it is by no mean inclusive of all topics that are covered in the midterm;examination! Besides, I need to explicitly remind you that it takes much practice to;master the course materials. Students who only work on the homework problem sets;(without investing needed time on learning/studying course materials and practicing;suggested problems) may find themselves underprepared for the examinations.;The answers to the problems are given for your reference. Due to the degree of;similarity between these homework problems and the actual examination problems;detailed solutions will NOT be posted. Please note that numerical illustrations similar;(but not identical) to these homework, and hence examination, problems can be found;in the online lecture notes (via Modules) for the respective chapters/topics!;View Full Attachment

Paper#29974 | Written in 18-Jul-2015

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