Show a detailed working and no use of excel. show Cash flow diagram. Morris Glas
ID: 2479307 • Letter: S
Question
Show a detailed working and no use of excel. show Cash flow diagram.
Morris Glass Company has decided to invest funds for the next 5 years so that development of “smart” glass is well funded in the future. This type of new-technology glass uses electrochrome coating to allow rapid adjustment to sun and dark in building glass, as well as assisting with internal heating and cooling cost reduction. The fi nancial plan is to invest first, allow appreciation to occur, and then use the available funds in the future. All cash flow estimates are in $1000 units, and the interest rate expectation is 9% per year.
Years 1 through 5: Invest $7000 in year 1, decreasing by $1000 per year through
year 5 Years 6 through 10: No new investment and no withdrawals.
Years 11 through 15: Withdraw $20,000 in year 11, decreasing 20% per year through year 15.
Determine if the anticipated withdrawals will be covered by the investment and appreciation plans. If the withdrawal series is over- or underfunded, what is the exact amount available in year 11, provided all other estimates remain the same?
Explanation / Answer
Future value of investment Cash outflow at the year 11 is calculated as under: Year Amount Future value @ 9% for 11th year Future value of investments at the year 11 1 $ (7,000) 11years 2.58043 $ (18,063.01) 2 $ (6,000) 10years 2.36736 $ (14,204.16) 3 $ (5,000) 9 years 2.17189 $ (10,859.45) 4 $ (4,000) 8 years 1.99256 $ (7,970.24) 5 $ (3,000) 7 years 1.82804 $ (5,484.12) Future value of investment at the year 11 $ (56,580.98) Present value of cash inflow withdrawals from year 11 to year 15 Year Withdrawals Present value @ 9% Present value of cash inflow 11 $ 20,000 0.38753 $ 7,750.60 12 $ 16,000 0.35553 $ 5,688.48 13 $ 12,800 0.32618 $ 4,175.10 14 $ 10,240 0.29925 $ 3,064.32 15 $ 8,192 0.27454 $ 2,249.03 Total present value of withdrawals $ 22,927.54 The future value of investment @ 9% $ 56,580.98 The present value of withdrawals @ 9% $ (22,927.54) Underfunded Investment $ 33,653.44 The investment is under funded by $33,653.44 because the future value of cash outflow is more than the present value of cash inflow. The exact amount available in year 11 is $56,580.98.