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Exercises (Time Value Money) 2022

Mr. Trex would need to invest RM14,264 annually over 15 years to accumulate RM800,000 at 8% interest compounded semi-annually. Investment B offering 8.16% annually would require RM29,098 annually, so Investment A is better. Ronald took out a RM400,000 loan at 6% over 30 years. His monthly payments are RM2,390 and after 180 payments the balance is RM283,224. Susan needs to save RM10,168 annually over 25 years at 10% to have RM1,000,000 at retirement. Then she can withdraw RM17,460 annually for 20 years after retirement. An investment paying RM500 in

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39 views2 pages

Exercises (Time Value Money) 2022

Mr. Trex would need to invest RM14,264 annually over 15 years to accumulate RM800,000 at 8% interest compounded semi-annually. Investment B offering 8.16% annually would require RM29,098 annually, so Investment A is better. Ronald took out a RM400,000 loan at 6% over 30 years. His monthly payments are RM2,390 and after 180 payments the balance is RM283,224. Susan needs to save RM10,168 annually over 25 years at 10% to have RM1,000,000 at retirement. Then she can withdraw RM17,460 annually for 20 years after retirement. An investment paying RM500 in

Uploaded by

wst
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Question 1

(a) 15 years from now, Mr. Trex would like to buy a house in that is worth RM800,000 at
that time. To accumulate this amount, Mr. Trex plan to invest an equal sum each year
in Investment A that will earn 8 percent interest compounded semi-annually with the
first payment made at the beginning of the year.

Required:

(i) calculate the amount Mr. Trex must deposit annually.

FV= PMT (((1+ i/2)^2n – 1)/ i/2)


RM800,000 = PMT (((1+ 0.08/2)^2*15)-1)/ 0.08/2)
RM800,000 = PMT ((1.04)^30- 1)/0.04
RM800,000 = PMT (2.2434/0.04)
PMT= RM800,000/56.085
PMT= RM14,264.06

(ii) if Mr. Trex is being offered 8.16 percent compounded annually in Investment B,
advise Mr. Trex on whether Investment A or Investment B is a better choice.
Show your workings.

FV= PMT ((1+i)^n-1)/ i)


RM800,000= PMT ((1+0.0816)^15 – 1)/0.0816)
RM800,000= PMT (2.2434/0.0816)
PMT= RM800,000/ 27.4926
PMT= RM29,098.74

 Mr. Trex should choose Investment A because he only need to save


RM14,264.06 every year to get RM800,000 in 15 years later.

(b) Ronald bought a house in Kota Kinabalu 15 years ago. To buy it, he took out a
RM400,000 loan for 30 years with monthly equal repayment at an annual rate of 6
percent.

Required:

(i) calculate Ronald’s monthly repayments.

PV= PMT (((1-(1+i/12)^-12n)/i/12)


RM400,000= PMT (((1- (1+0.06/12)^-360)/0.06/12)
RM400,000= PMT ((0.8340/0.005)
PMT= RM400,000/ 166.80
PMT= RM2,390.08

(ii) calculate the outstanding balance of the loan after Ronald paid off his 180 th
monthly payment.

PV= PMT (1-1/(1+0.06/12)^180/0.06/12)


PV= RM2,390.08 (0.5925/0.005)
PV= RM2,390.08 (118.50)
PV= RM283,224.48
(c) Susan, who is 35 years old, would like to have RM1,000,000 in 25 years time for her
retirement. Upon retirement, she would want to have a comfortable lifestyle. Calculate
how much must Susan save up now (not end of the year) until her retirement and how
much can she withdraw annually from her retirement fund if she can live for another 20
years after her retirement (assuming she has no other sources of income upon
retirement)? Assume that the rate of return is 10 percent.

FV= PMT ((1+i)^n-1)/ i)


RM1,000,000= PMT ((1+0.10)^25 – 1)/0.10)
RM1,000,000= PMT (9.8347/0.1)
PMT= RM1,000,000/ 98.347
PMT= RM10,168.08

 Susan has to save RM10,168.08 every year to get RM1,000,000 after 25 years.

FV= PMT ((1+i)^n-1)/ i)


RM1,000,000= PMT ((1+0.10)^20-1)/0.10)
RM1,000,000= PMT (5.7275/0.1)
PMT= RM1,000,000/57.275
PMT= RM17,459.62

 Susan can withdraw RM17,459.62 annually for 20 years.

(d) An investment will pay RM500 in three years, RM700 in five years, and RM1,000 in nine
years with 6 percent rate of return.

Required:

(i) calculate the present value of this investment.

Year Future Value Interest rate Present Value


1-3 RM500 0.06 RM419.82
1-5 RM700 0.06 RM523.09
1-9 RM1,000 0.06 RM591.86
Total RM1,534.77

(ii) if the investment is currently selling at RM1,550, would you invest? Explain your
answer.

- No, because an investment worth RM1,534.77 should not be selling at RM1,550.

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