Time Value of Money Practice Set There is a tremendous amount of calculator work with this practice

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Question:

Time Value of Money

Practice Set

There is a tremendous amount of calculator work with this practice set. For part B, it is best if you create an Excel solution. Please retain your responses because we will revisit this practice set in a later session.

Part C is a continuation of Module 2 work. In this problem, I am asking you to assess the impact caused by changes in the Days’ Sales Outstanding and Days’ Payables Outstanding.

Part A

Find the present value of the following cash flows at 2%, 5%, and 9%,

T=6

|---------|---------|--------|--------|--------|---------|--------|--------|--------|--------|

30 30 30 30 30 30

1000

T=10

|---------|---------|--------|--------|--------|--------|---------|--------|--------|---------|

30 30 30 30 30 30 30 30 30 30

1000

T=6

|---------|---------|--------|---------|-------|--------|--------|--------|--------|--------|

50 50 50 50 50 50

1000

T=10

|---------|---------|--------|--------|--------|---------|--------|--------|--------|---------|

50 50 50 50 50 50 50 50 50 50

1000

T=6

|---------|---------|--------|--------|--------|---------|--------|--------|--------|--------|

80 80 80 80 80 80

1000

T=10

|---------|---------|--------|--------|--------|--------|---------|--------|--------|--------|

80 80 80 80 80 80 80 80 80 80

1000

Part B

For each of the sets of cash flows, and using the value you derived at a 5%, do the following

Multiply each cash flow by the time period associated with the cash flow. For example for the first set of cash flow you would:

30 * 1

30 * 2

30 * 3

30 * 4

30 * 5

1030 * 6

Divide each product you just calculated by (1.05)^time

30 / 1.05

60 / 1.1025

90 / 1.15762

120 / 1.21551

150 / 1.27628

6180 / 1.34010

Add the numbers you just calculated  4988.602954

Divide that sum by whatever you got in part A for the first set of cash flows using the 5% rate  5.552228552

Repeat these steps for the remaining sets of cash flows limiting your analysis to the 5% rate for present value.

Discuss what you observe in Part A. What do you observe in Part B?

Part C

These are your financial statements for the year ending today:

BALANCE SHEET

Cash $ 340,000 Accounts Payable $ 2,720,000

Receivables 4,200,000 Accruals 980,000

Inventories 4,960,000 Notes Payable 1,300,000

Total Current Assets $ 9,500,000 Total Current Liabilities $ 5,000,000

Net Fixed Assets 2,500,000 Long –term Debt 2,000,000

Common Stock 3,800,000

Retained Earnings 1,200,000

Total Assets $12,000,000 Total Liabilities and Equity $12,000,000

INCOME STATEMENT

Sales $36,500,000

Less: Operating Costs 29,200,000

EBIT $ 7,300,000

Less: Interest 500,000

EBT $ 6,800,000

Less: Taxes (40%) 2,720,000

Net Income $ 4,080,000

Less: Dividends 3,500,000

Additions to Retained Earnings $ 580,000

You expect sales to increase 40% next year.

Assume you are currently operating at 75% capacity

Interest expense next year will be 15% of any interest-bearing debt balance at the beginning of the year

Dividends will increase by 50% next year

Operating costs are 60% fixed and 40% variable

Days Sales Outstanding are expected to decrease by 5 days next year

Days Payables Outstanding are expected to decrease by 4 days next year

Cash will vary with sales

Please calculate the external financing twice (1^st pass only). The first time, use the information given above. The second time you solve for external financing, please ASSUME DAYS’ SALES OUTSTANDING AND DAYS’ PAYABLES OUTSTANDING DO NOT DECREASE. Discuss what you observe.