LASA 1 – Financial Decisions
Net Present Value Net present value is a numerical calculation that shows the present value of an investment based on expected income from that investment in future years minus the cost of the project. Net present value is calculated by dividing the expected income of a project in each future year by a term equal to one plus a discount rate raised to a power equal to the year. The totals for each year then are added together, and the initial cost of the project is subtracted from that sum to arrive at the net present value. The discount rate represents the time value of money: the amount that could be made by committing the money to other opportunities. Net present value is based on estimates of future company …show more content…
Using net present value calculations, determine which has a higher ROI:
Buying a Chevrolet Impala today for $30,000, putting $15,000 down and taking a six-year loan for the rest at 5%.
$48,487 = 72-1 * 30,000 / 1.05 to the 72nd power – 15,000 or Leasing the Impala for 4 years at $329 a month. Since $4000 is due when the lease is signed, the rate will equal to 5%.
$-4,822 = 72-1 * 30,000 /1.05 to the 72nd power – 4,000
In the above calculations the company will lose money if they opt to lease the vehicle. The company will have a return on investment of 0.61 if they choose to buy the vehicle.
2. Another buy-or-lease alternative:
You could buy the home for $300,000, putting 20% down and renting it out at $1400 a month. Which would make more sense? Renting or leasing the home? Explain your rationale.
Buy: Purchase with the intent to stay in the home for ten years at an interest rate of 5%. 120 – 1 * 300,000 / 1.05 to the 120th power – 60,000 = …show more content…
The return on investment is 2.77 when calculating 107,260 - -60,740 / -60,740 = 2.77. Purchasing the home with the intent to stay live there for ten years will result in a negative return on investment due to the lack of income that will be gained by leasing the home to another family. Leasing the home will result in long-term financial benefits for the homeowner. I believe, providing my calculations are accurate, that when it is feasible to own property that can be rented out at a monthly rate that is higher than the cost of maintaining the home the homeowner will have an opportunity to increase his or her net worth.
Profitability of Return on Investment Return on investment can be used to measure businesses pricing policies, their capital investments, and amount of inventory needed to perform business. The profitability of a company takes into account how much money was spent before gains or losses are calculated. Keeping this in mind companies can make educated decisions regarding their future financial transactions and
Net Present Value Net present value is a numerical calculation that shows the present value of an investment based on expected income from that investment in future years minus the cost of the project. Net present value is calculated by dividing the expected income of a project in each future year by a term equal to one plus a discount rate raised to a power equal to the year. The totals for each year then are added together, and the initial cost of the project is subtracted from that sum to arrive at the net present value. The discount rate represents the time value of money: the amount that could be made by committing the money to other opportunities. Net present value is based on estimates of future company …show more content…
Using net present value calculations, determine which has a higher ROI:
Buying a Chevrolet Impala today for $30,000, putting $15,000 down and taking a six-year loan for the rest at 5%.
$48,487 = 72-1 * 30,000 / 1.05 to the 72nd power – 15,000 or Leasing the Impala for 4 years at $329 a month. Since $4000 is due when the lease is signed, the rate will equal to 5%.
$-4,822 = 72-1 * 30,000 /1.05 to the 72nd power – 4,000
In the above calculations the company will lose money if they opt to lease the vehicle. The company will have a return on investment of 0.61 if they choose to buy the vehicle.
2. Another buy-or-lease alternative:
You could buy the home for $300,000, putting 20% down and renting it out at $1400 a month. Which would make more sense? Renting or leasing the home? Explain your rationale.
Buy: Purchase with the intent to stay in the home for ten years at an interest rate of 5%. 120 – 1 * 300,000 / 1.05 to the 120th power – 60,000 = …show more content…
The return on investment is 2.77 when calculating 107,260 - -60,740 / -60,740 = 2.77. Purchasing the home with the intent to stay live there for ten years will result in a negative return on investment due to the lack of income that will be gained by leasing the home to another family. Leasing the home will result in long-term financial benefits for the homeowner. I believe, providing my calculations are accurate, that when it is feasible to own property that can be rented out at a monthly rate that is higher than the cost of maintaining the home the homeowner will have an opportunity to increase his or her net worth.
Profitability of Return on Investment Return on investment can be used to measure businesses pricing policies, their capital investments, and amount of inventory needed to perform business. The profitability of a company takes into account how much money was spent before gains or losses are calculated. Keeping this in mind companies can make educated decisions regarding their future financial transactions and