Part 1
Question A
The present value is calculated using the following formula;
PV =
(PV) is the present value, (C) is future value, (R) is the interest rate and (n) is the time period in years.
Using the interest rate of 7%
PV =
PV= = $14,018.6916
Using the interest rate of 4%
PV =
PV = = $ 14,423.0769
Question B
PV = n
(C) which represents the future value of the accounts is valued at $6,500.00 for account A and $12,600 for account B respectively, (R) which represents the discounting rate is given at 6% and n represents the time period in years which is given as one year for account A and two year for account B.
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Account A
PV =
. PV = = $6,132.0755
Account B
PV =
PV = = $11213.9551
Question C
Using 7% as the interest rate
PV = PV 1 + PV 2 + PV 3
PV = + 2 +
= $45,794,392.5233 + $53,279,762.4246 + $69,387,755.102 = $168,461,910.0499
Using 5% as the interest rate
PV = PV 1 + PV 2 + PV 3
PV = + + =
$46,666,666.6666 + $55,328,798.1859 + $73,427,781.6171= $175,423,246.4696
Using 3% as the interest rate
PV = PV 1 + PV 2 + PV 3
PV = 1 + 2 + =
$47,572,815.534 + 57,498,350.4572 + $77,788,963.1189 = $182,860,129.1101
Based on the above calculation with different interest rates at 7%, 5% and 3% respectively, it is evident that a high discounting rate reduces the present value of the stream of income of the gold mine. A low interest rate has a higher present value stream of income of the gold mine as illustrated above when the interest rate was valued at 7% the computed present value is $168,461,910.0499, if the interest rate is valued at 5%, the gold mine present value of income increases to $175,423,246.4696. Similarly, if the interest rate reduces further to 3%, the computed present value of the gold mine increases to $182,860,129.1101.
Part B
According to Finch (2016), a business plan is a document that contains a business establishment goals, objectives and historical background information of a particular business. A business may also entail the sources of capital, projected cash flows, expenses and risk associated with undertaking a particular investment or establishing a business. In most cases, a business plan is a common tool that is generally used by potential investors to investigate and conduct an assessment regarding the potential of a particular business and its expected returns or revenues. Investors are mainly concerned with using the business plan as a platform of basing their decision on whether to invest or not to invest in a particular business, especially by looking at the level of risks associated with undertaking that business investment. Ice Dreams, R J Wagner & Associates Realty, and Interstate Travel Center are some examples of business plans which present different types of business plans with different financial requirements in terms of investment capital and at the same time, they represent business plans with different levels of risks and returns for a specified period of time. Ice dreams are defined in the plan as a company deals with selling shave ice as their primary product and other secondary products such as soft drinks. R J Wagner & Associates Realty Company deals with investments on real estate business, on the other hand, Interstate Travel Center is defined according to its business plan as a Company that is expected to set up a truck stop center to provide hospitality and related services to their clients.
Risk is defined as the future probability of a particular business or investment project to meet its expected potential in terms of revenue generation and production capability. Risk assessment of businesses is a crucial aspect before investments are made, it involves analyzing the business competitors, the availability of substitute's products, availability of raw materials and the cost of labor in terms of human labor and capital intensive labor. It's important to note that each and every one of these aspects of business possesses a significant risk towards the performance of the business operations. As such it is important to carefully investigate the effect of these risks towards the success of the business. Based on the level of risks each of these business plans possesses, they can be classified as follows; Interstate Travel Center as the most suitable and best plan to invest in since it has relatively lower risk compared to other investments plans. Secondly, Ice Dreams Company is the second best suitable business plan due to the fact that it has a fairly lower risk compared to R J Wagner & Associates Realty Company which is associated with the highest risk compared to other business plans (Forlani & Mullins, 2000).
Interstate Travel Center, is recognized as the best plan to invest due to various reasons and factors which make its business operations seem profitable and less risky in the long run. One of the key strength of this plan is that it's part of an ever expanding transport industry which provides a continuous increasing customer base. The business location in Dallas, Texas also presents another significant strength which is favorable for any kind of business operations, very convenient to their clients and most importantly the competition around that region is low. The business plan also outlines that the establishment will incorporate various types of business activities such as restaurants, gas center, trucking amenities and a large convenience store. Ice dream business, requires a small start-up capital which means it can be financed easily and considering that it has a positive expected profit and cash flows from the first year of its operations valued at $10000 for the first year, $23000 for the second year and $37000 for the third year which represents a moderate risk investment. On the other hand, R J Wagner & Associates Realty business plan can be characterized with a high cost of expenses, high start-up capital requirement and the plan also outlines a negative profit in the first years of its operations. As such it represents the highest risk business plan to invest in its operations (Zimmerer, Scarborough & Wilson, 2005).
References
Finch, B. (2016). How to write a business plan . Kogan Page Publishers.
Forlani, D., & Mullins, J. W. (2000). Perceived risks and choices in entrepreneurs' new venture decisions. Journal of Business Venturing , 15 (4), 305-322.
Zimmerer, T., Scarborough, N. M., & Wilson, D. (2005). Essentials of entrepreneurship and small business management . Pearson/Prentice Hall.
