Case Discussion

Using the tools and concepts you’ve learned this Module, I’d like you to discuss the following Questions to Consider with Your Classmates. Before you join the discussion, complete the readings below and consider your responses to the guiding questions. You should post an initial response by , ET. I expect you to contribute thoughtful posts to the discussion multiple times . I’ll evaluate your work with the discussion grading rubric and provide you with feedback.

Questions to Consider with Your Classmates
1. The company that you work for is considering bidding on a government contract to rebuild an old bridge that has reached the end of its useful life. The two-year contract will pay the firm $11.5 million at the end of the second year. The project requires an initial cash outlay (or expenditure) of $7.0 million. The annual expenses for years 1 and 2 are estimated at $1.5 million. Your employer uses an interest rate of 7% to value similar projects. Because the cash inflow generated by the contract (for your employer) of $11.5 million when the contract ends exceeds the total cash outflows ($7.0 million + $1.5 million + $1.5 million), your employer’s financial manager believes that it should accept the contract. Do you agree? Why? Why not? How would you estimate the value of this project? Explain/discuss.
2. Discuss and explain the Time Value of Money (TVM) calculation(s) or method(s) that you would apply to the following Discounted Cash Flow (DCF) valuation problems:
Hint: You may want to perform the required calculations to answer these questions.
a. You are considering buying a business priced at $75,000. The interest rate used to value similar business opportunities is 10%. Your financial advisor presents you with the two (2) (opportunities shown below). Decide which business should you acquire? Explain/discuss the financial basis for your decision.
Year 1 Year 2 Year 3
Business A: Cash Flows $50,000 $30,000 $20,000
Business B: Cash Flows $5,000 $5,000 $100,000

b. You are planning to buy a condominium in 3 years and estimate that you will need $30,000 for a down payment. If the interest rate you can earn at the bank is 4%, and you can save $5,000 today, $7,500 at the end of the first year, and $10,000 at the end of the second year, discuss/explain how do you estimate the amount of money you will need to come up with at the end of the third year to have the $30,000 down payment.
c. Last year, a gourmet coffee shop located in New York City’s Grand Central Station, with a 50-year lease, produced annual cash flows of $400,000 (after all expenses were deducted). If the store’s cash flows are expected to grow at 3% per year (due to inflation), and similar businesses are valued using an annual interest rate of 7%, discuss/explain how you would estimate the value of this coffee shop. What TVM concept(s) or method(s) would you use?
3. Discuss/explain the difference between an annuity and a perpetuity, and the steps involved in calculating the future value of multiple cash flows.