a) An investment of £100,000 is expected to produce an annual net cash flow of £20,130 for each of the next ten years. Calculate the NPV of the investment if the required rate of return is 9 per cent and determine the approximate value of the investment's internal rate of return.
b) The manager responsible for the pension fund of Ruin plc has to present a report to the Board of Directors on the financial position of the fund. He decides to use the position of the typical employee to illustrate the fund's position. There is £30,000 currently held in the fund for each employee.
The typical employee has 15 years to go to retirement and the company's actuary has proposed that the company should anticipate having to fund pension payments over a retirement period of 12 years for the average employee.
The average pension payment per annum is expected to be £11,000 and the rate of return expected on the pension funds investment is expected to be 6 per cent.
The manager needs to determine the constant annual sum that the company needs to put into the pension fund for each of the next 15 years to be able to meet the fund's obligations. Determine this annual sum. (Assume all payments into the fund and all pension payments are made at the end of each year.)
c) You decided ten years ago to accept a plan put forward by a company in which you held shares to reinvest your annual dividends in the company's shares.
The value of your investment in the company at the time was £26,000. Taking into account the reinvestment of your dividend income this has grown to £96,390 today. Determine the rate of return on your investment over this time period.
d) RBM plc is considering the sale of one of its poorly performing division to a group of its managers. RBM has been offered two alternative payments for the division, an upfront payment of £3 million with a payment of £0.5 million after four years or an upfront payment of £1 million and four annual payments of £0.658 million.
The financial advisors of RBM suggests that the cost of funds to evaluate the proposals is eight per cent. Analyse the two payment possibilities and determine which one you would accept as a manager of RBM.