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Problem Set 04 - Introduction To Excel Financial Functions

1. The document presents 8 problems involving the use of Excel financial functions to analyze cash flows, investments, loans, and machine costs over multiple periods with varying interest rates. It includes calculating amounts at retirement with regular investments, determining the better of two investment options, and developing a 5-year economic analysis of a truck rental company for sale. 2. The problems involve using Excel functions to calculate amounts over time periods like retirement savings with annual deposits and interest, loan payments, and savings needed annually to cover future costs. 3. The document provides details needed to set up Excel models to analyze the financial scenarios, including cash flows, interest rates, time periods, and calculations required to evaluate the best options.

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98 views

Problem Set 04 - Introduction To Excel Financial Functions

1. The document presents 8 problems involving the use of Excel financial functions to analyze cash flows, investments, loans, and machine costs over multiple periods with varying interest rates. It includes calculating amounts at retirement with regular investments, determining the better of two investment options, and developing a 5-year economic analysis of a truck rental company for sale. 2. The problems involve using Excel functions to calculate amounts over time periods like retirement savings with annual deposits and interest, loan payments, and savings needed annually to cover future costs. 3. The document provides details needed to set up Excel models to analyze the financial scenarios, including cash flows, interest rates, time periods, and calculations required to evaluate the best options.

Uploaded by

asdf
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Problem Set 04 – Introduction to Excel Financial Functions and their Use in

Modeling
1. Pay Now or Pay Later?
a. You are buying a copier. Would you rather pay $11,000 today or $3,000 a year
for five years?
b. Would you rather opt for a payment scheme where you have to pay $3,000 at the
end of each year and must include an extra $500 payment at the end of Year 5?
Assume 12% interest rate per year.

2. Amount at Retirement
a. If at the end of each of the next 40 years, I invest $2,000 a year toward my
retirement and earn 8 percent a year on my investments, how much will I have when
I retire?
b. What happens if I invest $2,000 a year but at the beginning of each year?
c. What happens if I already have $30,000 in the bank and then invest $2,000 a year?
Assume 8% rate for all cases.

3. Loan Repayment
a. I am borrowing $10,000 for 10 months with an annual interest rate of 8%. Using
an Excel function determine my monthly payments.
b. What happens if the monthly payments are to be done at the beginning of each
month?
c. What happens if I have to make a payment of $1,000 at the end of 10 months?

4. Cost of a Machine
You want to replace a machine in 10 years, and you estimate the cost will be $80,000.
If you can earn 8% annually on your investments, using an Excel function, compute
how much money should you put aside at the end of each year to cover the cost of
the machine.
5. The Better Investment
Investment 1 requires a cash outflow of $10,000 today and $14,000 two years from
now. One year from now, this investment will yield $24,000. Investment 2 requires
a cash outflow of $6,000 today and $1,000 two years from now. One year from now,
this investment will yield $8,000. Assuming an interest rate of 0.2, use an Excel
function to determine which is a better investment.
6. Cash Flows
Consider the following set of cash flows over a four-year period. Using the Excel
function, determine the NPV of these cash flows, if r = 0.15 and cash flows occur at
the end of the year.
Year 1 2 3 4
Cash Flows -$600 $550 -$680 $1000

7. Pragati AI
Mr. Naveen, founder of Pragati AI, expects his new AI-based product line to start
generating Rs. 70,000 in annual profit beginning one year from now. He expects this
level of annual profit will continue for the succeeding 5 years. Bringing the product
line on stream will require an up-front investment of Rs. 2,50,000. Naveen is
wondering whether this is the most productive way to invest that initial Rs. 2,50,000.
Help him. Would Pragati AI be better off investing it in something else?
Jitu, co-founder of Pragati AI, has another product option. In this case, they need to
just spend Rs. 1,00,000 initially and an annual profit of Rs. 18,000 each year will
follow over a period of 7 years. Should Pragati AI go for this second option, instead
of the first? Assume a rate of 10% in both cases.

8. Flying Ford Truck Rental Company


The Flying Ford Truck Rental Company, which owns and rents out 50 trucks, is for
sale for $400,000. George Weaseley, the company’s owner, wants you to develop a
five-year economic analysis to assist buyers in evaluating the company.
The market rate for truck rentals is currently $12,000 per year per truck. At this base
rate, an average of 62 percent of the trucks will be rented each year. George believes
that if the rent were lowered by $1,200 per truck per year, utilization would increase
by seven percentage points. For example, at a $7,200 rental rate, 90 percent of the
trucks would be rented. Over the next five years, the base rental rate should remain
stable.
At the end of five years, it is assumed that the buyer will resell the business for cash.
George estimates that the selling price will be three times the gross revenue in the
final year.
The cost of maintaining the fleet runs about $4,800 per truck per year (independent
of utilization), which includes inspection fees, licenses, and normal maintenance.
Flying Ford has fixed office costs of $60,000 per year and pays property taxes of
$35,000 per year. Property taxes are expected to grow at a rate of 3 percent per year,
and maintenance costs are expected to grow 9 percent per year due to the age of the
fleet. However, office costs are predicted to remain level. Profits are subject to a 30
percent income tax. The tax is zero if profit is negative. Cash flow in the final year
would include cash from the sale of the business. Because the trucks have all been
fully depreciated, there are no complicating tax effects: Revenue from the sale of the
business will effectively be taxed at the 30 percent rate. Investment profit for the
buyer is defined to be the Net Present Value of the annual cash flows, computed at
a discount rate of 10 percent. (All operating revenues and expenses are in cash.) The
calculation of NPV includes the purchase price, incurred at the beginning of year 1,
and net income from operations (including the sale price in year 5) over five years
(incurred at the end of the year). There would be no purchases or sales of trucks
during the five years.
Design a spreadsheet that will allow the firm to determine the Net Present Value of
cash flows over the five-year period.

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