|
Question 1150553:
--------------- QUESTION FOLLOWS --------------------------
Case Study - Planning Ahead
Precision Machining Corporation has been growing steadily over the past decade. Demand for the company’s products continues to rise, so management has decided to expand the production facility; $2 800 000 has been set aside for this over the next four years.
Management has developed two different plans for expanding over the next four years: Plan A and Plan B. Plan A would require equal amounts of $750 000, one year from now, two years from now, three years from now, and four years from now. Plan B would require $300 000 now, $700 000 one year from now, $900 000 two years from now, and $975 000 four years from now.
The company has decided to fund the expansion with only the $2 800 000 and any interest it can earn on it. Before deciding which plan to use, the company asks its treasurer to predict the rates of interest it can earn on the $2 800 000. The treasurer expects that Precision Machining Corporation can invest the $2 800 000 and earn interest at a rate of 4.5% p.a. compounded semi-annually during Year 1, 5.0% p.a. compounded semi-annually during Years 2 and 3, and 5.5% p.a. compounded semi-annually during Year 4. The company can withdraw part of the money from this investment at any time without penalty.
Questions
4. Suppose the treasurer found another way to invest the $2 800 000 that earned interest at a rate of 4.9% compounded quarterly for the next five years.
a. Could the company meet the cash requirements of the original Plan A with this new investment? (Show all your calculations.)
b. Could the company meet the cash requirements of Plan B with this new investment? (Show all your calculations.)
c. If the company could meet the cash requirements of both plans, which plan would the treasurer recommend? In other words, which plan would have the lower present value?
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! see my worksheet below.
the NPV analysis shows:
NPV plan A at 4.9% per year compounded quarterly. $7,481,893.62
NPV plan B at 4.9% per year compounded quarterly. $6,878,018.55
that's the present value of all the cash flows at 4.9% annual percentage rate of return compounded quarterly to give you an effective annual percentage of 4.990775%
i believe you want the plan with the highest NPV.
that would be plan A.
i also took a look at the net future value and plan A was higher.
the cash flow results are positive when money is flowing into the account and negative when money is flowing out of the account.
the higher NPV and NFV are for plan A because it retained more money in the account earlier in the study period than plan B.
i could be wrong because i haven't done this in a while and this problem is a little different because usually there is an investment that is an outflow and there are revenue streams that are inflows, while with this problem there is money at hand in the beginning and it is being doled out over time.
what you see is my best guess as to what the solution should be.
|
|
|
| |
