1) After graduating from graduate school you create it big—all because of your success in financial management. You make a decision to award a scholarship for needy finance students that will give $3,000 per year indefinitely, beginning one year from now. How much should be deposited today to fund scholarship fund under given conditions?
a) The interest rate is 10% compounded annually.
b) The interest rate is 8% compounded annually.
c) For both 10 and 8%, if everything remains same except that first disbursement will not be made until three years from now.
2) Winery requires $500,000 for expansion of its warehouse. Company plans to finance $100,000 with internally generated funds but desires to secure the loan for remainder. The contracting firm’s finance subsidiary has presented to give the loan based on 6 annual payments of $97,300 each. Alternatively, San Jose Winery’s bankers will lend firm= $400,000, to be repaid in annual instalments (covering both principal and interest), at the 15 percent interest rate. Ultimately, the insurance firm would also loan money; it needs a lump sum payment of $750,000 at end of 6 years.
a) Based on respective annual percentage cost of 3 loans (you should present each effective interest rate), which one must San Jose choose? In case of 2nd loan by firm’s bankers, what would be dollar value of annual payment?
b) What other considerations might be significant in addition to cost?