Value Computation of an Investment\'s

¶ … Value

Computation of an Investment's Present Value

Scenario

a) Considering a discount rate of 8%, the present value of the investment is of 7,000 x 100 / 108 = $6,481.48

b) Considering a discount rate of 3%, the present value of the investment is of 7,000 x 100 / 103 = $6,796.12

Scenario

a) the present value of Account a is of 4,000 x 100 / 105 = $3,809.52

b) the value of Account B. In one year's time is of 9,600 x 100 / 105 = $9,142.85

The value of account B. today (its present value) is of 9,142.85 x 100 / 105 = $8,707.47

Scenario

a) 8% discount rate

Present value of the income in year 1: 42,000,000 x 100 / 108 = $38,888,888.89

Present value of the income in year 2: 62,000,000 x 100 / 108 = $57,407,407.41

$57,407,407.41 x 100 / 108 = $53,155,006.86

Present value of the income in year 3: 99,000,000 x 100 / 108 = $91,666,666.67

$91,666,666.67 x 100 / 108 = $84,876,543.21

$84,876,543.21 x 100 / 108 = $78,589,391.86

Value of investment today = $38,888,888.89 + $53,155,006.86 + $78,589,391.86 = $170,633,287.6

b) 6% discount rate

Present value of the income in year 1: 42,000,000 x 100 / 106 = $39,622,641.51

Present value of the income in year 2: 62,000,000 x 100 / 106 = $58,490,566.04

$58,490,566.04 x 100 / 106 = $55,179,779.28

Present value of the income in year 3: 99,000,000 x 100 / 106 = $93,396,226.42

$93,396,226.42 x 100 / 106 = $88,109,647.56

$88,109,647.56 x 100 / 106 = $83,122,309.02

Value of investment today = $39,622,641.51 + $55,179,779.28 + $83,122,309.02 = $177,924,729.8

c) 4% discount rate

Present value of the income in year 1: 42,000,000 x 100 / 104 = $40,384,615.38

Present value of the income in year 2: 62,000,000 x 100 / 104 = $59,615,384.62

$59,615,384.62 x 100 / 104 = $57,322,485.21

Present value of the income in year 3: 99,000,000 x 100 / 104 = $95,192,307.69

$95,192,307.69 x 100 / 104 = $91,531,065.09

$91,531,065.09 x 100 / 104 = $88,010,639.51

Value of investment today = $40,384,615.38 + $57,322,485.21 + $88,010,639.51 = $185,717,740.1

The gold mine promises to generate incomes of $203,000,000 and its present value is in all cases lower than the expected profits. Yet, it has to be noted that as the discount rate decreases, the costs of making this investment increase.

Part Two:

The most eloquent analysis of any investment project is conducted through an analysis of the benefits and limitations it reveals. In this order of ideas, the following lines will reveal the costs and advantages of Shaved Ice Beverage, Real Estate Brokerage and Truck Stop.

Shaved Ice Beverage

Costs:

Revenues are pegged to demand, which is seasonal, meaning that profits are not sustainable throughout the course of the entire year

Revenues might not be sustainable once the novelty element wares out

The company does not currently own any assets

Despite selling beverages, the product offering is quite specific

Benefits:

The product is extremely popular among all group ages and ethic formations

Globally increasing popularity and growing demand for shaved ice

Numerous benefits pegged to the location, such as the seven-month warm weather or access to a wide market

Will be the first such business in the city and the element of novelty is expected to generate increased demand; will also diversify product offering

Real Estate Brokerage

Costs:

The real estate industry is currently in a pit and investments in this direction might prove unsuccessful

Since it serves exclusively the higher income population, it will encounter high operational costs

The lack of diversification translates into the possibility of one or two slow months generating significantly negative results for the overall year

Increased costs with the human resource as the adequate employees must be selected and trained

Benefits:

The firm and it owner enjoy great reputation and the broker bases her plans on years of extensive expertise

Just like any other cyclic life, the real estate industry will pick up and the Real Estate Brokerage could be met with great development opportunities

Despite the focus on high income population, the company diversifies its approach through ongoing communications with sellers, buyers and agents

Truck Stop

Costs:

The company possesses no assets and it will be necessary to invest large sums of money to build the travel center from scratch

It will require the usage of vast amounts of resources and will take a long period of time before it commences to make a return on investment

It will have to comply with a wide series of regulations, including NAFTA, and these will even further increase the costs

Benefits:

Diversified product and service offering, meaning that the travel center will attract the attention of more consumer segments

Distinctive management for the two main branches, meaning that the two entities will be run separately, will reveal distinct responsibilities and financials

Demand for their services in on the rise in Dallas, and the competition is limited in the vicinity