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TVM Additional Q

1) The alternative that provides the highest future value (RM24,000 at the end of 8 years) is the best choice, regardless of the interest rate. A higher discount rate decreases the present value of future cash flows, so an investment would be worth less. 2) An annual contribution of RM12,000 would allow receiving an RM14,000 annuity after 18 years of retirement. 3) a) Larry's annual mortgage payments are RM8,160. b) He will pay RM120,000 in interest over 25 years. c) He should be willing to pay RM24,000 to refinance at a lower 10% rate given the time value of money.

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162 views1 page

TVM Additional Q

1) The alternative that provides the highest future value (RM24,000 at the end of 8 years) is the best choice, regardless of the interest rate. A higher discount rate decreases the present value of future cash flows, so an investment would be worth less. 2) An annual contribution of RM12,000 would allow receiving an RM14,000 annuity after 18 years of retirement. 3) a) Larry's annual mortgage payments are RM8,160. b) He will pay RM120,000 in interest over 25 years. c) He should be willing to pay RM24,000 to refinance at a lower 10% rate given the time value of money.

Uploaded by

wahida_halim
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Question1 (I) Your rich godfather has offered you a choice of one of the three following alternatives: RM10,000

now; RM2,000 a year for eight years; or RM24,000 at the end of eight years. Assuming you could earn 11 percent annually, which alternative should you choose? If you could earn 12 percent annually, would you still choose the same alternative? (II) Based on the situation (I), what happens to the present value of a cash flow stream when the discount rate increases? Place this in the context of an investment. If the required return on an investment goes up but the expected cash flows do not change, would you be willing to pay the same price for the investment or would you pay more or less for this investment than before interest rates changed? Question 2 You wish to retire after 18 years, at which time you want to have accumulated enough money to receive an annuity of RM14,000 a year for 20 years of retirement. During the period before retirement you can earn 11 percent annually, while after retirement you can earn 8 percent on your money. What annual contributions to the retirement fund will allow you to receive the RM14,000 annuity? Question 3 Larry Davis borrows RM80,000 at 14 percent interest toward the purchase of a home. His mortgage is for 25 years. a. How much will his annual payments be? (Although home payments are usually on a monthly basis, we shall do our analysis on an annual basis for ease of computation. We will get a reasonably accurate answer.) b. How much interest will he pay over the life of the loan? c. How much should he be willing to pay to get out of a 14 percent mortgage and Into a 10 percent mortgage with 25 years remaining on the mortgage? Assume current interest rates are 10 percent. Carefully consider the time value of money. Disregard taxes.

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