Assignment

Question 1: Fresenius Kidney Care is building their flagship facility, which includes a new state-of-the art dialysis clinic, in Buffalo's Medical Campus. The cost for the new 20,000 ft² facility is 510,225,000. Fresenius will pay for this upgrade with 10% of their internal capital (i.e. cash) and will finance the remaining 90% with a commercial installment loan. Fresenius will make quarterly payments on this loan for the next 15 years. The loan has a rate of 6% interest compounded quarterly.

(a) Using the tabular method, provide the details of the first six payments. Include in your answer the quarterly payment (A_n), interest payment (I_n), principal payment (P_n), and ending balance (B_n) for each payment. Provide a table of answers and show your work for each calculation type (i.e. must show at least one calculation for A_n, I_n, P_n, and B_n to demonstrate how you arrived at these answers. (12 points)

(b) How much will Fresenius pay toward interest in the 27th payment? Directly calculate this amount - do not enumerate the entire loan schedule.

(c) Fresenius wants to ensure that they will pay less than $3,000,000 in interest during the first half (i.e. 30 payments) of the loan. If this is the case their board may require additional cash (internal funds) be used to finance the building. Can Fresenius proceed with the current financing plan or will their board require changes? Provide your answer and then support it with numerical analysis.

(d) After Fresenius makes the 30th payment they are offered the opportunity to refinance their remaining debt. The new (refinanced) loan will be repaid on a monthly basis for 10 additional years and has an interest rate of 0.33% per month. How much would Fresenius pay each month for the refinanced loan?

(e) Why would Fresenius consider refinancing their loan according to these new terms?

Question 2: You've just accepted a lucrative consulting contract with a medium sized local manufacturing firm to help improve the efficiency of their manufacturing processes. The company has offered three different payment options for your consideration.

Option 1 (Fixed Salary): $79,400 per year with no annual raises

Option 2 (Increasing Salary): $72,250 for the first year with annual raises of 5% starting in year 2

Option 3 (Irregular Salary): Because of the irregular nature of the assignment, the company has offered to pay you a salary to reflect the intensity of the assigned tasks. They will give you $7500 signing bonus today, $70,000 in the first year, $92,000 in the second year, $65,000 in the third year, and 581,000 in the last two years of the contract.

Assume, initially, that your salary is to be paid only at the end of each year and that the prevailing interest rate is 9% compounded annually.

(a) Draw a cash flow diagram that corresponds to each of the three salary options.

(b) Which of the three options should you choose? Explain your choice and support it with numerical analysis.

(c) If each of these payment options is to be paid two times per month (bi-monthly) in equal installments, instead of the proposed one time per year, what would be the equivalent equal bi-monthly payments that you would receive under each salary option?

(d) You have estimated your living expenses (rent, food, gas, etc.) to be $3500 per bi-monthly pay period. What minimum annual salary would you need to receive (assume that you are paid in equal bi-monthly payments) to cover these expenses, assuming the interest rate stays the same?

Question 3: Find economic equivalence of the following cash flow at year 3

Question 4: As a budding songwriter, which you do in addition to studying engineering, you've written the hit new Christmas pop song. You've started to receive annual royalty payments, paid at the end of each year, for your work. However, you realize that success in the music business can be short-lived and want to invest your royalties while the song is popular (and therefore you are receiving the largest royalty payments). After talking with your network of Christmas songwriters, a small but wealthy group, you estimate that you'll continue to receive royalty checks for the next 12 years, after which everyone will have tired of the song and the royalty checks will end. You anticipate receiving royalties in the amount of $150,000 at the end of the first year, after which the amount will decrease by $10,000 each year. Further, you have decided to invest all of your royalties in an account that earns 8% interest compounded annually.

(a) What is the future value of these royalty payments?

(b) Instead of the normal payment plan, with declining payments over 12 years, the record company has offered to pay you in equal amounts each year. Based upon the provided information, how much would you receive each year (i.e. each payment) under this revised payment plan?