Task 1: You invest a single amount of $12,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?
Mr. Flint retired as President of the Color Tile Company but is currently on a consulting contract for $45,000 per year for the next 10 years.
A) If Mr. Flint's opportunity cost (potential return) is 10 percent, what is the present value of his consulting contract?
B) Assuming that Mr. Flint will not retire for two more years and will not start to receive his 10 payments until the end of the third year, what would be the value of his deferred annuity?
Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation. His broker quotes a price of $1,170. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 13 percent interest, and it has 18 years remaining until maturity. The current yield to maturity on similar bonds is 11 percent.
Do you think the bond is overpriced? Do the necessary calculations.
Altman Hydraulic Corporation will invest $160,000 in a project that will produce the follow cash flows. The cost of capital is 11 percent. Should the project be undertaken?
Use the net present value . (Note that the third year's cash flow is negative.)
Task 2: Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment will be made. The Austrailian gold mine will cost $1,600,000 and will produce $300,000 in years 5 through 15 and $500,000 in years 16 through 25. The U.S. gold mine will cost $2,000,000 and will produce $250,000 per year for the next 25 years. The cost of capital is 10 percent.
A) Which investment should be made
B) If the Austrailian mine justifies an extra 5 percent premium over the normal cost of capital because of its riskiness and relative uncertainty of flow, doe the investment decision change?