Dear Group 2,
Thank you for your work on the first case.
Your work did correctly state the PVA of the 20-year annuity of $19718 ($19,720.11 was fine), but you did not correctly state the gross amount of income of $29318. -5 points
Mr. Road can spend: $19,718 + $600 + $9,000 = $29,318 per year
Your work did not state the real interest rate in your case of 4.8%. -5 points
(1.09/1.04) - 1 = 0.048
Your group did provide a detailed analysis of over the 20-year period with and without the inflationary figures.
Your group did not state the correct real income amount. If Mr. Road wishes to maintain the real value of his savings account at $12,000, then he will have to increase the balance of the account in line with inflation, that is, by 4% each year. Since the nominal interest rate on the account is 5%, only the first 1% of interest earnings on the account, or $120 real dollars, is available for spending each year. The other 4% of earnings must be re-invested. So total real income is: $14,200 + $9,000 + $120 = $23,320 -5 points
The real sum that can be spent out of savings was a payment of $14200. -5 points
[Using a financial calculator, enter: n = 20; i = 4.8; PV = (−)180,000; and then compute PMT = $14,200]
Your case analysis did not address all of the individual questions requested in the chapter 5 case. The level of written effort performed on this group assignment was not sufficient. Please put forth more written analysis efforts in the future case assignments. -5 points
Thank you for your combined efforts on this chapter 5 case assignment.
Dr. Woo
Dear Group 2,
Questions 1 and 2 addressed the price of the shares. Under the past growth scenario the shares should sell for $333.33. Under the rapid growth scenario the shares should sell for $384.25.
Question 3 addressed the rate of return that should be used for the project. You will find that the case stated that 11% should be the discount rate. This was stated in the final paragraph...