2020 Moed B - Business, econ, entrepreneurship - final-1 (1).pdf Page 4 of 13 Question 1 (24 points) "Randy’s" an ice-cream manufacturer is planning to invest in a new product called "strawberry mint...

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2020 Moed B - Business, econ, entrepreneurship - final-1 (1).pdf Page 4 of 13 Question 1 (24 points) "Randy’s" an ice-cream manufacturer is planning to invest in a new product called "strawberry mint ice-cream ", which will include real strawberries. To manufacture the product, Randy’s will have to buy a strawberries processor machine. In addition, since the old ice-cream machine of the company broke down it has to replace it with a new one. Below is the purchasing information of the two machines: - A strawberries processor machine: The machine costs $500,000 and is depreciated in a straight line over 4 years. This machine has a salvage value of $30,000. - A new ice-cream machine: The machine costs $850,000 and is depreciated in a straight line over 5 years. This machine has a scrap (salvage) value of $200,000. Other information: The strawberry mint ice-cream project's estimated lifecycle is 5 years. Randy’s estimates that in the first year the Product will have revenues of $1 million, and then revenues are expected to increase by 12% annually. Production costs are expected to be 60% of the revenues. Marketing costs are expected to be 30% of the revenues in the first year and then after 10% of the revenues in the following years. At the end of year 5 Randy’s estimates that it will be able to sell the strawberries process machine for $120,000. The ice-cream machine will worth 0 and therefore will not be sold. During the last 5 years, Randy’s has spent $20,000 in the development the of the strawberry mint ice cream. To support the project, the Randy’s will need to invest in working capital. The company will need to invest at the beginning of each year in inventory 10% of the expected revenues in the following year, in accounts receivables 25% of the current year’s revenues. Accounts payable will amount to 15% of the cost of goods sold at the beginning of each year. All the working capital will be recovered at the end of the project in 5 years. Randy’s corporate tax is 25% and Capital gain tax is 20%. Randy’s cost of capital is 13%. Should Randy’s undertake the project? You should write your answers on this paper. There should be plenty of space to show your work. Please show all work required to obtain each answer. Answers without justification will receive no credits, unless otherwise instructed in the question. If you make any additional assumptions, state them clearly. Page 5 of 13 Page 6 of 13 Question 2 (19 points) You received an investment opportunity in real estate. The required investment amount is $1,000,000. Since you do not have enough money, you are searched for partners. You found one friend who would like to enter to the investment. Although she does not have the necessary funds today, she promise to transfer $400,000 in 4 years. Accordingly, you have decided to take two loans: 1) A 4-year bullet loan with an annual stated interest rate (APR) of 6.6% compounded monthly. The loan will be paid in a single payment equal to $400,000 (for the interest and principal) at the end of the fifth year; 2) A 25-year mortgage for the remaining required funds to purchase the house. The mortgage has an annual stated interest rate (APR) of 6% and will be repaid in equal monthly payments over the next 25 years. a. What is your monthly mortgage payment? Answer: The monthly payment is $ . Page 7 of 13 4 years in to the mortgage (4 years after you took the mortgage), you are considering paying off your mortgage. b. If the interest rate of the mortgage remains 6% (APR), what will be the amount you will need to pay in order to pay off the mortgage, 4 years after you took it? Answer: The amount you will need to pay in order to pay off the mortgage, 4 years after you took it is $ . c. Suppose instead that when you came to pay off the mortgage (after 4 years), you found out that the annual interest rate decreased to 5.4% (APR). The bank is demanding a prepayment fee in order to pay off the mortgage. What will be the maximum prepayment fee that you will be willing to pay? Answer: The maximum prepayment fee that you will be willing to pay is $ . Page 8 of 13 Question 3 (20 points) You are 35 years old. You have just finished your B.A studies and found a new and rewarding job. You decided that it is time to set up a retirement plan. You estimate that you can deposit $1,000 in real terms each month until your retirement. You want to retire at the age of 60. You contacted a retirement agent and received the following offer: an inflation-linked plan (a real plan) which pays an annual stated real interest rate of 4.8%. Assume that the annual expected inflation is 2.43% (for the entire period). a. According to the data you have, how much money, in real terms, will you have in your retirement plan once you retire? Answer: At retirement, you will have $ (in real terms) in your retirement plan. b. According to the data you have, can you estimate how much money, in nominal terms (in cash), will you have in your retirement plan once you retire? Answer: At retirement, you will have $ (in nominal terms) in your retirement plan. Page 9 of 13 c. Assuming that the actual inflation is the same as expected one, what is your 60th nominal contribution to the retirement plan (the amount you deposit at the end of year five, in cash)? Answer: Your 60th contribution to the retirement plan is: $ . d. You estimate that you will live until the age of 90. How much money, in real terms, will you be able to withdraw each month from the age of 60 until the age of 90? Answer: You will be able to withdraw $ in real terms each month. Page 10 of 13 Question 4 (12 Points) Consider the following three projects: Project/time line 0 1 2 3 4 A -95 50 40 40 0 B -115 35 40 45 50 C -125 60 60 60 -20 The cost of capital of the firm is 10%. a. Based on the IRR decision rule: i. Should you invest in Project A? Below are multiple choice for the IRR calculation i) 16.55% ii) 17.61% iii) 18.31% iv) 20.22% v) Cannot calculate Answer: I should/should not (circle one) invest in Project A. ii. Should you invest in Project B? Below are multiple choice for the IRR calculation i) 16.55% ii) 17.61% iii) 18.31% iv) 20.22% v) Cannot calculate Answer: I should/should not (circle one) invest in Project B. Page 11 of 13 iii. Should you invest in Project C? Below are multiple choice for the IRR calculation i) 16.55% ii) 17.61% iii) 18.31% iv) 20.22% v) Cannot calculate Answer: I should/should not (circle one) invest in Project C. b. Assume that we can only take one of the projects. Which one would we choose? Answer: You would choose project ____________ Page 12 of 13 Question 5 (25 Points) You are the new investment manager of Michael and Ariel. You received from the previous investment manager of Michael and Ariel’s partial information regarding their portfolios: - Both have an optimal portfolio. - The expected return in Michael’s portfolio is 6%. - The SD in Ariel’s portfolio is 12%. You know that the current risk-free interest rate is 5% and the market portfolio has an expected return of 8% and a SD of 10%. a. What is the proportion of each brother’s investment in a risk-free asset out of their portfolio? Answer: the proportion of Michael’s investment in a risk-free asset out of his portfolio is __________% the proportion of Ariel’s investment in a risk-free asset out of