Question

1) These independent projects are available: Project Required Investment $30,000 $40,000 $50,000 Returns at Time 1 $40,000 $60,000 $80,000 • a) You have $70,000 of capital available to invest at time 0. In addition, you can borrow $10,000 at 40% interest (repayment $14,000 at time 1). Any capital not invested in one or more of the above projects will be invested in the ordinary course of business at a 20% rate return. Determine which of the independent alternatives should be selected to maximize the overall rate of return. . b) Assuming that this company has unlimited capital and the projects are independent, determine which should be accepted. MARR is 20%. +2) You have been selected to advice your company about a new conveyor system. They presently owned conveyor can be sold for $166,000 or can provide adequate service for 2 more years at an operating cost of 105,000 next year and $167,000 the year later. Coney's Company has been offered $170,000 for the old conveyor as a trade-in on a new conveyor system that has a purchase price of $210,000. The conveyor is expected to have an economic life of 12 years, with operating cost of $23,000 the first year that increase 16,500 per year thereafter. The value of the old conveyor in 2 years will be the same as the new system in 12 year: $21,000. An 8 percent interest charge is appropriate. What is your advice? 3) You have loaned $10,000 to a friend whom you consider a good credit risk at nominal interest of 12 percent compounded monthly. The loan period is 1 year. You plan to take each monthly installment received from your friend and invest it on the day received in a saving account that pays you interest at the nominal rate of 6 percent compounded monthly. What nominal interest rate are you receiving on the total return from the loan plus the reinvestment of the monthly repayment installment?

have a bit of trouble with understanding what is telling so i got about 30 mins to figure this out. please help and thank you.

Answer 1

Hello

Please note that as per the Guidelines, since all the questions in the image are unrelated and hence only the first question is solved.

Question 1

a) To achieve the optimum portfolio, it can be explained by elimination of options. Lets first understand certain critical points. In percentage terms,

1. Project A earns 33.33%
2. Project B earns 50%
3. Project C earns 60%
4. Idle funds earns 20%.

Further, the cost of borrowings is too high, i.e 40%.

Hence, certain observations can be made from the above,

• Since the idle funds are yielding 20% returns, it will be advisable to invest the idle funds only if no other investments alternatives are possible.
• As the cost of borrowings is more than returns on idle funds, it will not be optimal to borrow and invest in idle funds in any of the alternatives.

Lets look at some of the alternatives:

Project Investment Returns Profit Profit % 33% 1 30,000 40,000 70,000 40,000 60,000 1,00,000 10,000 20,000 30,000 50% 43% Total 60%) 12 2 Idle Total idle 50,000 20,000 70,000 80,000 24,000 1,04,000 30,000 4,000 34,000 20% 49% C 50,000 30,000 60% 80,000 40,000 30,000 10,000 (4,000) 36,000 Borrow Total 33% -40% 45% 80,000 1,20,000

In Option 1, the portfolio earns a return of 43% overall and overall earning are $30,000.

In Option 2, the idle funds further boost the earnings to $34,000 however, they bring down the overall profit %.

In Option 3, though the profit % is lower than Option 2, it yields more profit - $36,000.

Here, the absolute profit earnings carry more weight than the profit %. Hence, the Option 3 is the most ideal investment strategy.

You can consider other alternatives not listed above, however the most optimal will be Option 3.

b) MARR is the Minimum Acceptable Rate of Return.

MARR is 20%. Since all the projects are independently earning more than 20%, can be accepted and invest the balance idle funds at 20%.