Case Study£ºmacmillan and Grunski Consulting

3589 WordsFeb 1, 200815 Pages
Introductory Overview The group project, Macmillan and Grunski Consulting, consists of two sections. The first part explains the case about discounted cash flow analysis, by answering the given nine questions. The second part discusses the retirement planning.  Case Study Sandra Macmillan, one of the founders of Macmillan and Grunski Consulting which provides financial planning services, is now giving a short project to Mary Somkin, the firm¡¯s top secretary. If she can successfully demonstrate her ability and skill of discounted cash flow (DCF) analysis, one of the most important concepts in financial planning, she can expand her role in the firm and broaden her job opportunity. The project was an actual analysis for…show more content…
b) & c) With a same $18,000 investment, in order to earn $35,000 after 6 years, how the nominal interest rates of the First National Bank differ if coumpounded annually, semiannually, quarterly and daily? Known factors ??? Solution: iN= n*[(FV/PV)¬1/(n*6) - 1] FV=$35,000 PV=$18,000 N=6 year Sub-Question n= Compounding frequency: a) 1 (Annual) EAR = ($35,000/$18,000)¬1/6 - 1=11.72% b) 2 (Semiannual) EAR =2* [($35,000/$18,000)¬1/(2*6) - 1]=11.40% 4 (Quarterly) EAR = 4*[($35,000/$18,000)¬1/(4*6) - 1]=11.24%% 365 (Daily) EAR = 365*[($35,000/$18,000)¬1/(365*6) - 1]=11.08% Implication: with same other factors, the nearer compounding frequency to +¡Þ, the smaller change in interest rate. Big difference occurs when nominal interate rates are compounded annually and quarterly. Question 5 Ordinary annuity The option mentioned in Q4 is to make one initial investment at the beginning of Year 1. The alternative to be discussed in question 5 is different. (a) According to this new plan, the investment is divided into six equal installment paid annually. As the equal payments are made at each period, this type of investment is regarded as an Ordinary Annuity. (b)&(c) In these two questions, the interest is compounded
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