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Quiz 3 and quiz 3 question




1, Bob Terwilliger received $ I 2,3 45 for his services as financial consultant to the mayor's office of his;hometown of Spiingfield. Bob says that his consulting work was his civic dufy and that he should not;receive any compensation. So, hehas invested his paycheck into an account paying 3.98% annual interest;and left thi account in his will to the city of Springfield on the condition that the city could not collect any;money from the account for 200 y*u.s. i-lo* much money will the city receive from Bob's generosity in;200 years?;2. Over the past few years, Microsoft founder Bill Gates' net worth has fluctuated between $20 and $130;billion. hr early 2006, it was about $26 billion-after he reduced his stake in Microsoft from2l percent to;around l4 percent by moving billions into his charitable foundation. Let's see what Bill Gates can do with;his money in the following problerns.;a. Manhattan's native tribe sold Manhattan Island to Peter Minuit for $24 in 1626. Now, 384;years later in 2010, Bill Gates wants to buy the island from the "current natives." How much would;Bill have to pay for Manhattan if the "current natives" want a 6 percent annual return on the original;$24 purchase price?;b. Bill Gates decides to pass on Manlrattan and instead plans to buy the city of Seattle, Washington;for $50 billion in 10 years. How much would Bill have to invest today at l0 percent compounded;annually in order to purchase Seattle in l0 years?;c. Now assume Bill Gates only wants to invest half his net worth today, $13 billion, in order to buy;Seattle for $50 billion in 10 years, What annualrate of return would he have to earn in order to;complete liis purchase in 10 years?;d. Instead of buying and running large cities, Bill Gates is considering quitting the rigors of the;business world and retiring to work on his golf garne. To fund his retirement, Billwould invest;his $20 billion fortune i1safe investments with an expected annualrate of return of 7 percent' He;also wants to make 40 equal annual withdrawals from this retirement fund beginning a year from;today, running his retirement fund to $0 at the erid of 40 years. How much can his annual;withdrawal be in this case?;3. Peterson Trucking is contemplating the acquisition of Armour Transport, a competing trucking firm;and estimates that durilg the next year Armour Transport's flows from the acquisition will vary;depending upon the state of the looal economy;Scenario I Scenario II Scenario III;(State of the Economy);Probability;(Recession) Q''iormal) (Expansion);30% 50% 20%;2.;J.;Cash flow for each Scenario $(50,000) $150,000 $250,000;L Calculate the expectecl cash flow for next year using the estimates provided above;Assume the probability of a recession increases to 40Y0, the normal scenario probability remains;at S1Vo,ancl the expansion probability drops to only l0%. What is your estimate of the expected;cash flow for next year under this circumstance?;Your analysis of the acquisition suggests that for the investment to have at least azero NPV, it;must produce an annual expected cash flow of$100,000 per year over the next five years;Assuming that the cash flow you estimated in part a is the expected cash flow for years one;through five, what would you like to know about the project cash flows to make you more;comfortable with the idea that you can indeed generate the requisite $ 1 00,000 per year casl, flow?;(lt{o computations required.)


Paper#69114 | Written in 18-Jul-2015

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