Finance Question... I NEED HELP!!!

[xchangx]

Here's the Question:

Please help, someone!

18.
Your company is looking at an investment that today costs $4,312 and returns after-tax
cash flow exactly one year, two years, and three years from today, respectively, equal
to $2,000 , $2,300 and $2,800 . The company intends to finance the investment at a
rate of 14.7% and to repay the loan (principal and interest) with the investment cash
flows as they occur. How much wealth will the investment create?

a. the wealth created in the company at the time the loan finally is paid-off equals $1,358

b. the capitalized value of wealth the project creates today is $1,562

c. the wealth created in the company at the time the loan finally is paid-off equals $1,181

d. the wealth created in the company at the time the loan finally is paid-off equals $1,562

e. the capitalized value of wealth the project creates today is $1,181

 

[Keego]

I love homework questions.

 

[sygyzy]

What exactly is the question? What did you just list under it? Are those your answers?

 

[xchangx]

yeah it's a multiple choice question

 

[dfi]

Well I gotta tell you, I don't know what the answer is. But if I had to try, this is what I would do:

Present value of 4312, loaned at 14.7% compound interest, right? And we want to pay off this loan in 3 years, right? So, the future value of 4312 at 14.7% is:

4312 * (1.147)^3 = 6506.82

So the future value of this loan is 6506.82. At the end of 3 years, we want to pay off the principal and the interest. So we want to make 3 equal annual installments to pay off our future value of 6506.82 to the bank, at an interest rate of 14.7%. Well, that's an ordinary annuity, future value problem. Thus:

6506.82 = R ( Future value factor-ordinary annuity)

The formula for our FVF-OA is : ( ( (1+i)^n) - 1)/ i, where i is the interest rate (14.7%) and n is the number of years (3).

6506.82 = R ( ( ( (1+0.147)^3) - 1)/ 0.147)
R = 1879.17

So now we know that in order to pay off the bank's principal and interest in 3 equal annual installments, each year we must put down 1879.17. Well that's great because each year we are earning 2000, 2300, and 2800, which are all over the annual payment of 1879.17 we must make.

Thus:
year 1: 2000 - 1879.17 = 120.83
year 2: 2300 - 1879.17 = 420.83
year 3: 2800 - 1879.17 = 920.83

120.83 + 420.83 + 920.83 = $1462.49 the company earns by the time the loan is paid off.

Well... $1462 is $100 off from answer D... so at this point I'm hoping you typed something wrong by 100.

So I'm hoping that:

2300 in year 2 is actually 2400, OR

2800 in year 3 is actually 2900

Cuz otherwise I just did the problem wrong. But maybe I gave you an idea. Btw I've never taken a finance class, so there's my disclaimer.

dfi

 

[KK]

D

 

[dfi]

So, what's the answer xchangx?

dfi

 

[sygyzy]

Horribly written. Did you mean "How much wealth will the investment create *IF*":

 

[LordSnailz]

Originally posted by: dfi
Well I gotta tell you, I don't know what the answer is. But if I had to try, this is what I would do:

Present value of 4312, loaned at 14.7% compound interest, right? And we want to pay off this loan in 3 years, right? So, the future value of 4312 at 14.7% is:

4312 * (1.147)^3 = 6506.82

So the future value of this loan is 6506.82. At the end of 3 years, we want to pay off the principal and the interest. So we want to make 3 equal annual installments to pay off our future value of 6506.82 to the bank, at an interest rate of 14.7%. Well, that's an ordinary annuity, future value problem. Thus:

6506.82 = R ( Future value factor-ordinary annuity)

The formula for our FVF-OA is : ( ( (1+i)^n) - 1)/ i, where i is the interest rate (14.7%) and n is the number of years (3).

6506.82 = R ( ( ( (1+0.147)^3) - 1)/ 0.147)
R = 1879.17

So now we know that in order to pay off the bank's principal and interest in 3 equal annual installments, each year we must put down 1879.17. Well that's great because each year we are earning 2000, 2300, and 2800, which are all over the annual payment of 1879.17 we must make.

Thus:
year 1: 2000 - 1879.17 = 120.83
year 2: 2300 - 1879.17 = 420.83
year 3: 2800 - 1879.17 = 920.83

120.83 + 420.83 + 920.83 = $1462.49 the company earns by the time the loan is paid off.

Well... $1462 is $100 off from answer D... so at this point I'm hoping you typed something wrong by 100.

So I'm hoping that:

2300 in year 2 is actually 2400, OR

2800 in year 3 is actually 2900

Cuz otherwise I just did the problem wrong. But maybe I gave you an idea. Btw I've never taken a finance class, so there's my disclaimer.

dfi

wow ... nice detailed post!