As the manager of the pension fund, considering different
investment options will help you make better decisions for your company and
your clients. Please respond to the following questions, providing supporting
data and showing your calculations.
Before starting your calculations, review the following
materials:
time value of money analysis and The Time Value of Money
valuing perpetuities and annuities and Discounted Cash Flow
Applications
amortizing a loan
Question 1: If the pension plan invests $95 million today in
10-year US Treasury bonds (riskless investment with guaranteed return) at an
interest rate of 3.5 percent a year, how much will it have by the end of year
10?
Question 2: If the pension plan needs to accumulate $14
million in 13 years, how much must it invest today in an asset that pays an
annual interest rate of 4 percent?
Question 3: How many years will it take for $197 million to
grow to be $554 million if it is invested in an account with a quoted annual
interest rate of 5 percent with monthly compounding of interest?
Question 4: The pension plan also invests in physical
assets. It is considering the purchase of an office building today with the
expectation that the price will rise to $20 million at the end of 10 years.
Given the risk of this investment, there should be a yield of 10 percent
annually on this investment. The asking price for the lot is $12 million. What
is the annual yield (internal rate of return) of the investment if the purchase
price is $12 million today and the sale price 10 years later is $20 million?
Should the pension plan buy the office building given its required rate of
return?
Question 5a: The pension plan is also considering investing
$70 million of its cash today at a 3.5 percent annual interest for five years
with a commercial bank. How much will the $70 million grow to at the end of 5
years?
Question 5b: Now take the amount of your answer in Ques 5a,
and assume this money is invested in an annuity due with the first payment made
at the beginning of the 6th year. The annuity due makes a total of 15 yearly
(equal) payments. How much will the annual payments be from years 6 to 20, if
the rate at which these payments are discounted is also 3.5 percent?
Question 6: The pension plan is about to take out a 10-year
fixed-rate loan for the purchase of an information management system for its
operations. The terms of the loan specify an initial principal balance (the
amount borrowed) of $4 million and an APR of 3.75 percent. Payments will be
made monthly. What will be the monthly payment? How much of the first payment
will be interest, and how much will be principal? Use the Excel PMT function to
provide the answers to these questions.
Submit your Time Value of Money Report and Calculations to
the dropbox below. Be sure to show your calculations in Excel and provide a
narrative analysis in PowerPoint. Your narrative analysis should summarize the
results of your analysis and make recommendations for the benefit of the company.
