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A family currently live in an apartment whose monthly rent is $950. They are thinking of buying a house which would cost $220,000. They plan to live in this house for 5 years and sell it at the end of the 5th year. They would put a down payment of $20,000 and finance the balance through a mortgage at 3.5% interest rate. The mortgage is to be repaid in 5 annual instalments (which include both principal and interest) at the end of each year for the next 5 years The house will have the following additional expenses: annual maintenance: $1500; Property taxes:$5500; Insurance: $1200. Assume they are in tax bracket of 20% and the price of home, rent and expenditure increases by 2.5% per year. Their opportunity cost or required rate of return is 5% per year. Note that property taxes are tax deductible and there no tax payable on capital gains. Use annual compounding for amortization schedule of mortgage.
Calculate the rent saved during year 4.
An investor bought a racehorse for $1 million. The horse's average winnings were $700,000 per year and expenses averaged $200,000 per year. The horse was retired after 3 years, at which time it was sold to a breeder for $175,000. Assuming MACRS depre..
Future Value. You are hoping to buy a house in the future and recently recieved an inheritance of $22,000. You intend to use your inheritance as a down payment on your house. If you put your inheritance in an account that earns 7 percent interest com..
Calculate the profit margin (net income/net sales) and asset turnover (net sales/total assets) to compute the return on assets (ROA). Now introduce the equity multiplier (total assets/total equity) to find the return on equity (ROE).
Draw a time line to show the cash flows of the project and compute the project's payback period, net present value (NPV), profitability index (PI), and internal rate of return (IRR).
Samsung Electronics is considering production of a new cell phone. The project will require an investment of $20 million and generate $8 million per year over the next 3 years. If the phone is well-received (good condition), the project will produce ..
You are depositing $20,000 in a retirement account today and expect to earn an average return of 6% per year on this money. How much additional income will you earn if you leave the money invested for 25 years instead of just 20 years? (show calculat..
What kinds of risk are included in investment risk? Go online to survey current or recent financial news. Find and present a specific example of the impact of each type of investment risk. In each case, how did the type of risk affect investment perf..
Which of these are assumptions of the Modified Accelerated Cost Recovery System (MACRS)?
Suppose that B2B Inc. has a capital structure of 37 percent equity, 17 percent preferred stock, and 46 percent debt. If the before-tax component costs of equity, preferred stock, and debt are 14.5 percent, 11 percent, and 9.5 percent, respectively, w..
An asset used in a four-year project falls in the five-year MACRS class (MACRS Table) for tax purposes. The asset has an acquisition cost of $6,400,000 and will be sold for $1,530,000 at the end of the project. what is the after tax salvage value of ..
A Treasury bill that settles on May 18, 2012, pays $100,000 on August 21, 2012. Assuming a discount rate of 5.41 percent, what is the price and bond equivalent yield?
Based on what you have learned so far this semester (Investments-Bodie, Kane, Marcus), do you believe that U.S. equity markets are efficient? Explain.
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