Consider the following timeline: If the current market rate of interest is 7%, t
ID: 2383877 • Letter: C
Question
Consider the following timeline:
If the current market rate of interest is 7%, then the future value of this timeline as of year 3 is closest to:
a. $1,720
b. $1,500
c. $1,404
d. $1,717
Which of the following organization forms for a business does not avoid double taxation?
a. Limited Liability Company
b. Limited Partnership
c. "C" Corporation
d. "S" Corporation
The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000. The Sisyphean Company expects cash inflows from this project as detailed below:
Year One
Year Two
Year Three
Year Four
$200,000
$225,000
$275,000
$200,000
The appropriate discount rate for this project is 16%.
The NPV for this project is closest to:
a. $176,270
b. $179,590
c. $450,000
d. $123,420
You are considering purchasing a new automobile that will cost you $28,000. The dealer offers you 4.9% APR financing for 60 months (with payments made at the end of the month). Assuming you finance the entire $28,000 and finance through the dealer, your monthly payments will be closest to:
a. $467
b. $527
c. $1,454
d.$457
Year One
Year Two
Year Three
Year Four
$200,000
$225,000
$275,000
$200,000
Explanation / Answer
Part 1)
The future value of a stream of cash flow can be derived with the use of following formula:
Future Value = Cash Flow Year 0*(1+Rate)^3 + Cash Flow Year 2*(1+Rate)^2 + Cash Flow Year 3*(1+Rate)^1
Since, the first cash flow occurs today (at time 0), we will earn interest on the first cash flow for complete 3 years and so on for other years.
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Using the values provided in the question, we get,
Future Value = 500*(1+7%)^3 + 500*(1+7%)^2 + 500*(1+7%)^1 = $1719.97 or $1,720 (which is Option A)
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Part 2)
"C" Corporation (which is Option C)
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Explanation:
In case of C corporation, any distribution of profits to shareholders in the form of dividends gets subject to tax twice. It is so because the profits earned by the company are first taxed at corporate rate (before distribution) and thereafter any profits distributed to shareholders are taxed at indiviual rate. Other forms of corporation can avoid this double taxation by either distributing the income in the form of wages to employees/shareholders or by transferring the income directly to owners/partners without any need for dividends.
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Part 3)
The NPV (Net Present Value) of any project can be calculated with the use of following formula:
NPV = Cash Flow Year 0 + Cash Flow Year 1/(1+Discount Rate)^1 + Cash Flow Year 2/(1+Discount Rate)^2 + Cash Flow Year 3/(1+Discount Rate)^3 + Cash Flow Year 4/(1+Discount Rate)^4
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Using the values provided in the question, we get,
NPV = -450,000 + 200,000/(1+16%)^1 + 225,000/(1+16%)^2 + 275,000/(1+16%)^3 + 200,000/(1+16%)^4 = $176,264.52 which is closest to $176,270 (which is Option A)
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Part 4)
The amount of monthly payment can be calculated with the use of PMT function/formula of EXCEL/Financial Calculator. The function/formula for PMT is PMT(Rate,Nper,-PV,FV) where Rate = Interest Rate, Nper = Period, PV = Present Value and FV = Future Value (if any)
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Here, Rate = 4.9%/12, Nper = 60, PV = $28,000 and FV = 0
Using these values in the above function/formula for PMT, we get,
Monthly Payment = PMT(4.9%/12,60,28000,0) = $527.11 or $527 (which is Option B)