INTRODUCTION TO CORPORATE FINANCE

Introduction to Corporate Finance



Introduction to Corporate Finance

The asset to be purchased is 102Y.1967 Corvette Coupe, 427-390 hp, factory air, power glide, numbers match, (appears to be "The Real Deal" and affirmed legitimate by CCAS in June 2011) with the original factory body/trim tag. Marina Blue paint with Black stinger and Bright Blue interior. Body-off restored in 1985 and again recently to show condition. It was produced with the 390 hp engine, air conditioning, and automatic transmission. The available price of care is $90000 (Proteam Corvette, 2009).

The five year Treasury bill has an interest rate of around 1.5%, which is compounded annually (U.S. Department of Treasury, 2011). To be 90000 dollars at the end of 5 year, the yearly saving at this compounded rate should be equal to 90000/1.015^5-1/.015 = 50000/5.1523 = $ 17468. The 5.1523 FVIF has been calculated by using the formula for future value of an ordinary annuity and which is 1+r^n-1/r. The annuity is to be deposited at the end of each year commencing from today. If the amount is to be deposited at the start of the year starting from today, then the future value of an annuity due formula to be used and which is nothing but, just multiply the above formula by 1+r, therefore, here the FVIV for annuity due at 1.5% will be 5.1523*1.015 , which is equal to 5.2296. The yearly saving to be made under annuity due is 90000/5.2296 = 17210. The difference in annuity due and annuity ordinary for yearly saving is around $258. It is because of the time value of money in annuity due, which is compounded more than annuity ordinary.

The amount to be saved depends on the time period and the rate of interest. The time period comprises of two factors, the duration, and how quickly the amount is compounded, it may be on daily, monthly, quarterly, semiannually or yearly basis. So far in our both situation we have used the yearly compounding either at the end of the year or start of year. Bur if we change our compounding period on a monthly basis and keeps the other factors same, the monthly saving will be 90000/62.2669 = $1445. The total saving on a monthly basis will be 1445*60 = 86700, while, on a yearly basis, it is 17468*5 = 87340. The difference is because of period of compounding in a year, on a ...