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Case #1Diaz Manufacturing

Michele Diaz is the founder of Diaz Manufacturing.Michele plans to expand her business. Company's expansion plans require a significant investment, which she plans to finance with a combination of additional funds from outsiders plus some money borrowed from banks. Company's financial records are not well maintained. Naturally, the new investors and creditors require organized and detailed financial statements than Michele has previously prepared.Ms. Diaz has assembled the following information:

($ millions)

Michele Diaz is ready to meet with Austin Mark, the loan officer for Wells Fargo. She is asking to borrow $30 million.The meeting is to discuss the mortgage options available to the company to finance the new facility.

Austin begins the meeting by discussing a 30-year mortgage. The loan would be repaid in equal monthly installments. Because of the previous relationship between Diaz Manufacturing and the bank, there would be no closing costs for the loan. Austin states that the APR of the loan would be 6.00 percent. Ms. Diaz asks if a shorter mortgage loan is available. Austin says that the bank does have a 20-year mortgage available at the same APR.

Michele decides to ask Austin about a "smart loan" she discussed with a mortgage broker when she was refinancing her home loan.A smart loan works as follows: every two week a mortgage payment is made that isexactly one-half of the traditional monthly mortgage payment. (Hint: To determine how much is bi-weekly payment >>>calculate PMT as if it is 30-year mortgage and then divide by 2). The APR of the smart loan would be the same as the APR of the traditional loan.

Austin also suggests a bullet loan, or balloon payment, which would result in the greatest interest savings. At Michele's prompting, he goes on to explain a bullet loan. The monthly payments of a bullet loan would be calculated using a 30-year traditional mortgage. In this case, there would be a 5-year bullet. This would mean that the company would make the mortgage payments for the traditional 30-year mortgage for the first five years, but immediately after the company makes the 60^thpayment, the bullet payment would be due. The bullet payment is remaining principal of the loan. Ms. Diaz then asks how the bullet payment is calculated. Austin tells her that the remaining principal can be calculated using an amortization table, but it is also the present value of the remaining 25 years of mortgage payments for the 30-year mortgage.

Michele has also heard of an interest-only loan and asks if this loan is available and what the terms would be. Austin says that the bank offers an interest-only loan with a term of 10 years and an APR of 3.9 percent. He goes on to further explain the terms. The company would be responsible for making interest payments each month on the amount borrowed. No principal payments are required. At the end of the 10-year term, the company would repay the $30 million. However, the company can make principal payments at any time. The principal payments would work just like those on a traditional mortgage. Principal payments would reduce the principal of the loan and reduce the interest due on the next payment.

Tony is still unsure of which loan she should choose. She has asked you to answer the following questions to help her choose the correct mortgage.

1.What are the monthly payments for a 30-year traditional mortgage?

2.What are the payments for a 20-year tradition mortgage?

3.Create an amortization table for the first six months of the traditional 30-year loan. How much of the second payment is interest?

4.How long would it take for Diaz Manufacturing to pay off the smart loan assuming 30-year traditional mortgage payment?

Why is this shorter than the time needed to pay off the traditional mortgage? How much interest would the company save?

5.Assume Diaz Manufacturing takes out a bullet loan under the terms described. What are the payments on the loan?

6.What is the amount of the last payment of the loan?

7.What are the payments for the interest-only loan?

8.Which mortgage is the best for the company? Are there any potential risks in this action?

Case #2Picking the Best Lottery Payoff Option

Congratulations! You have won the $ 1 million lottery grand prize. You have been presented with several payout alternatives, and you have to decide which one to accept.The alternatives are as follows:

$1 million today

$1.2 million lump- sum in two years.

$1.5 million lump-sum in five years.

$2 million lump-sum in eight years.

Your cousin, s stockbroker, advises you that over the long-term you should be able to earn ten percent on an investment portfolio.

You are intrigued by the choice of collecting the prize money today or receiving double the amount of money in the future. Which payout option should you choose?

Case #3The Growth Rate of the World's Population

Hannah, an industrial relations major, is writing a term paper and needs an estimate on how fast the world population is growing. In her almanac, she finds that the worlds' population was an estimated 7.1 billion people at the end of 2014. The United Nations estimates that the population will reach 9 billion people at the end of 2054. What will be the world's population at the end of 2019, if you use the annual growth rate implied by United Nations' numbers?

Case #4Eric Fisher of Kansas City Chiefs

Eric Fisher, a number 1 draft pick of the Kansas City Chiefs, and his agent are evaluating three contract options. Each option offers a signing bonus and a series of payments over the life of the contract. Fisher uses a 10.25 percent rate of return to evaluate the contracts. Given the cash flows for each option, whish one should he choose?

Case #5.APR vs EAR

Samantha plans to invest some money so that she has $5,500 at the end of three years.

Option A

APR- 4.20%

m/per year - 365

Option B

APR - 4.90%

m/ per year - 12

Option C

APR- 5.20%

m/ per year - 4

Option D

APR- 5.40%

m/per year - 1

1.How much should she invest today given the choices above?

2.What is her best choice?

3.What is EAR each account is earning? Support your decision in question 2.

4.Three years later: she has $5,500.She did not use this money as she intended, so she decided to reinvest this sum again.Calculate the final balance in each account using all four options at the end of year 1, year 5, year 20.

Case #6The Pizza Dough Machine

As the owner of a pizza parlor, you are considering whether to buy a fully automated pizza dough preparation machine. Your staff is wildly supportive of the purchase because it would eliminate a tedious part of their work. Your accountant provides you with the following information:

The cost, including shipping, for the pizza machine is $25,000.

Cash savings, including labor, raw materials, and tax savings due to depreciation, are $3,500 per year for 10 years.R=10 percent.

As you arrive at the pizza parlor in the morning, the staff is in a festive mood because word has leaked out that the new machine will save the shop $35,000 and only cost $25,000.

1.Calculate the payback period, internal rate of return, net present value, and the profitability index of the proposed endeavor.

2.Based on your analysis, should the owner of pizza parlor buy the pizza dough machine?