Time Value Of Money Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Question No. 7(a):

Answer:

Mikey Jonson would be paid $5,336,968.43 at the end of the 2^nd year, which is the present value of his 5 year contract after the 2^nd year.

Question No. 7(b):

Answer:

Mikey Jonson would be paid $6,000,000 at the end of the 2^nd year, which is the present value of his 5 year contract after the 2^nd year.

Cash Flows	1500000	1545000	1591350	1639091	1688263
PV 8%		$5,336,968.43
PV 3%		$6,000,000.00

Question No. 8:

Answer:

The nine missing entries are mentioned below:

Installments #	Date	Interest	Principal	Balance
37	Jan, 2017	$179.32	$595.37	$32,007.94
38	Feb, 2017	$176.04	$598.65	$31,409.29
39	Mar, 2017	$172.75	$601.94	$30,807.35
40	Apr, 2017	$169.44	$605.25	$30,202.10

Question No. 9:

Answer:

The total outstanding balance of the loan as of December 31, 2012 is $215,720.99 and total outstanding balance of loan as of December 31, 2013 is $208,121.07 and the interest paid in 2013 was $7,386.63.

Year	Interest	Principal	Balance
2012	$7,646.19	$7,340.36	$215,720.99

2013	$7,386.63	$7,599.92	$208,121.07

Question No. 10:

Answer:

The couple will have to invest $403.059 in the 1^st quarter in order to have $4,500,000 at the end of 38 years with the interest rate of 6.4% compounded quarterly.

Future Value needed	$ 4,500,000
Time	38 years
Rate	6.4% compounded quarterly
PV	= FV / (1+i)^n
	$ 403,059

Question No. 11:

Answer:

The Financial Vice President, who was in favor of using Straight Line Depreciation method was correct because the above mentioned method generates more tax savings.

							Tax Sheild Computation
MACRS	Years	Gross Cash Flows	Tax Savings	Net Cash Flows	Discount Factor	Present Value	Cost	Depreciation	Tax Savings

	0	-300000		-300000	1	-300000	300000	60000	18000
	1	80000	18000	98000	0.9091	89091	240000	76800	26880
	2	80000	26880	106880	0.8264	88331	163200	31334	12534
	3	80000	12534	92534	0.7513	69522	131866	15191	7292
	4	80000	7292	87292	0.6830	59621	116675	13441	6452
	5	80000	6452	86452	0.6209	53680	103234	5946	2854
	6	80000	2854	82854	0.5645	46769	97287	97287	46698
	7	80000	46698	126698	0.5132	65016		300000	120709
	8	105000		105000	0.4665	48983
						221013

							Tax Sheild Computation
Straight Line	Years	Gross Cash Flows	Tax Savings	Net Cash Flows	Discount Factor	Present Value	Cost	Depreciation	Tax Savings

	0	-300000		-300000	1	-300000	300000	37500	11250
	1	80000	11250	91250	0.9091	82955	300000	37500	13125
	2	80000	13125	93125	0.8264	76963	300000	37500	15000
	3	80000	15000	95000	0.7513	71375	300000	37500	18000
	4	80000	18000	98000	0.6830	66935	300000	37500	18000
	5	80000	18000	98000	0.6209	60850	300000	37500	18000
	6	80000	18000	98000	0.5645	55318	300000	37500	18000
	7	80000	18000	98000	0.5132	50289		37500	18000
	8	105000	18000	123000	0.4665	57380
						222066

Question No. 11(b):

Answer:

At 16% cost of capital, the company will be indifferent between both the depreciation methods.

							Tax Sheild Computation
MACRS	Years	Gross Cash Flows	Tax Savings	Net Cash Flows	Discount Factor	Present Value	Cost	Depreciation	Tax Savings

	0	-300000		-300000	1	-300000	300000	60000	18000
	1	80000	18000	98000	0.9091	89091	240000	76800	26880
	2	80000	26880	106880	0.8264	88331	163200	31334	12534
	3	80000	12534	92534	0.7513	69522	131866	15191	7292
	4	80000	7292	87292	0.6830	59621	116675	13441	6452
	5	80000	6452	86452	0.6209	53680	103234	5946	2854
	6	80000	2854	82854	0.5645	46769	97287	97287	46698
	7	80000	46698	126698	0.5132	65016		300000	120709
	8	105000		105000	0.4665	48983
						221013
		IRR	16%

							Tax Sheild Computation
Straight Line	Years	Gross Cash Flows	Tax Savings	Net Cash Flows	Discount Factor	Present Value	Cost	Depreciation	Tax Savings

	0	-300000		-300000	1	-300000	300000	37500	11250
	1	80000	11250	91250	0.9091	82955	300000	37500	13125
	2	80000	13125	93125	0.8264	76963	300000	37500	15000
	3	80000	15000	95000	0.7513	71375	300000	37500	18000
	4	80000	18000	98000	0.6830	66935	300000	37500	18000
	5	80000	18000	98000	0.6209	60850	300000	37500	18000
	6	80000	18000	98000	0.5645	55318	300000	37500	18000
	7	80000	18000	98000	0.5132	50289		37500	18000
	8	105000	18000	123000	0.4665	57380
						222066
		IRR	16%