FINA2006 Principles of Finance

Question 1; Excel Practice Task 1 (Time Value of Money): (40 marks) Ronald Trump has just inherited a commercial building that is expected to produce the following cash flows for the next 8 years: Year 1: $100,000; Year 2: $200,000; Year 3: $300,000; Year 4: $400,000; Year 5: $500,000; Year 6: $600,000; Year 7: $700,000; Year 8: $800,000. However, Ronald Trump would rather receive the same cash flow each year and as such, he approached a bank to sell the commercial building in return for a fixed cash flow each year for the next 8 years. The bank has agreed to this arrangement, based on an interest rate of 12% p.a. compounded monthly applied to the valuation of the commercial building. If this arrangement goes ahead, how much will Ronald Trump receive each year? Question 2; Excel Practice Task 2 (Capital Budgeting): (40 marks) Gold Digger is considering a major investment in a new gold mine in South Australia. According to initial estimates, the investment outlay would be $3,000,000 and the project would generate incremental cash flows of $600,000 per year for 9 years. The required rate of return by the investors is 14% p.a. compounded annually. (a) Calculate the Accounting Rate of Return (ARR) (10 marks) (b) Calculate the Net Present Value (NPV) (10 marks) (c) Calculate the Internal Rate of Return (IRR) (10 marks) (d) Based on (b) and (c) above, should this project be accepted? Why? (10 marks) To answer Task 2, you MUST use EXCEL commands/functions to do ALL calculations 250 word summary. Provide a 250-word summary detailing the EXCEL commands/functions/operations you have used to solve Task 1 and Task 2. In your summary, you must explain clearly each step you performed in using EXCEL to arrive at the final answers, including the purpose of each calculation and the inbuilt EXCEL commands/functions employed
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