Reference no: EM132172321
Module Overview: Fundamental Concepts in Financial Management
Assume that your family is planning to purchase a car. You find the following options on the car dealership lot-equitable in price and of your interest:
A red, two-seater convertible sports car
A sport-utility vehicle
A minivan
To make the buying decision, you must evaluate the available options to ensure that your investment will pay off in the long run. While it may be tempting to purchase the sports car, it may not fulfill the requirement of your family-if there are four members in the family, the sports car would not have sufficient room for all of them.
Hence, the sports car is not a choice to consider here. However, further considerations will be required to decide between the sport-utility vehicle and the minivan-the initial price or investment and the future costs (i.e., fuel costs, maintenance costs, and insurance costs).
Similar to this scenario, the managers of a company expend a significant amount of time and effort in determining what projects should be pursued as well as the right financing mix for these projects. This module reviews the tools and techniques that management uses in making important decisions.
Module Readings:
Complete the following readings early in the module:
Module overview
From your course textbook, The portable MBA in finance and accounting, 4th, read the following chapters:
Discounted Cash Flow
Capital Structure
Planning Capital Expenditure
From the Internet:
Financial sites to review and become familiar with:
Moneychimp: learn Stock Investing, Index Funds, Valuation Models
The Concise Encyclopedia of Economics
Investopedia - Educating the world about finance
Calculating the Weighted Average Cost of Capital (WACC)
(Capital Asset Pricing Model) Calculator
Module Assignment Overview: In this module's assignment, you will discuss specific situations where the time value of money is applied in personal and professional situations. You will also discuss risk and risk aversion.
Assignment: The Time Value of Money-Preparing for Home Ownership
Instructions:
Upon graduating from Argosy University with a degree in Finance, John Simple found a great job as a banking officer with Capital Two Bank in Dallas. Although he and his partner Joan had several college loans that required payments, their goal was to set aside funds for the next five years so that they could get out of the small apartment in Irving, Texas. After reviewing the listings in the areas surrounding DFW and speaking to their bosses about possible transfers, John and Joan decided upon Plano as their desired future location for a home.
Based on house prices they received from a local realtor, they determined that the home they needed currently costs around $178,000 which includes 2% closing costs. To avoid paying Private Mortgage Insurance, John and Joan need to make a down payment of 20%. Since they are saving for the potential purchase, it will be five years before they buy the home.
This gives them time to save for the down payment, moving, and furniture costs, which they estimate will be 10% more than the required down payment. They also expect home prices in Plano to continue to increase each year at 2.5% per annum rate as presented by their realtor.
John, being the finance graduate, wanted to adequately prepare for their future purchase and told Joan that he would take all this information and present an overview of how much would be required once their estimated purchase date became a reality. In addition, John would show how much money they needed to save each month in their house investment account at E-Trade, which averages 5% annual return.
Tasks:
Write a 2-3-page paper where you answer the questions above. Make sure you identify the question and then respond showing all calculations using math or Excel functions.
What is the estimated purchase price of the home in 5 years?
How much would need to be saved for the down payment?
How much would need to be saved for closing, moving, and furniture costs?
Considering that they have $10,000 already saved (half of which was provided by Joan's parents as a wedding gift), how much money do they need to save each month to reach their goal?
Suppose John could change investment plans at E-Trade and earn an additional 1.5% per annum without additional risk, how much money do they need to save each month to reach their goal? How much in investment dollars would they save by increasing their investment percentage?