Question 6

PV = CF/(1/(1+r))^n

Interest Rate
Year 1 5%
Year 1.5 6%
Year 2 7%

Option 1:
Upfront payment 100,000
year 1 35,000

PV 100000+35000/(1+0.05)^1
PV 133333

Option 2:
Upfront payment 20,000
Monthly Payment 10,000

PV 20000+10000/(1+(0.05/12))^1*12
PV 139,502

Option 3:

Profit in Year 1 140,000

Profit in Year 2 160,000

Amount PV
Semi Annual Payment 1 70,000 70000/(1+( 68,293
Semi Annual Payment 2 70,000 70000/(1+( 68,293
Semi Annual Payment 3 80,000 80000/(1+( 77,670
Semi Annual Payment 4 80,000 80000/(1+( 77,295
291,550

Following are the present value of future cash flows under all 3 options
Option 1 133333
Option 2 139,502
Option 3 291,550

The company should choose 3rd option as it has highest present value that is 291550 amongst all three options

Question 8

Investment Amount 18,000

a
Interest Rate 3%
Investment Amount 18,000
Interest 540
Maturity Value 18,540

b
Interest Rate 2.90%
Compounding Monthly
Investment Amount 18,000
Interest 529
Maturity Value 18,529

c
Interest Rate 2.80%
Compounding Daily
Investment Amount 18,000
Interest 511
Maturity Value 18,511

Question 9

Compounding rate is more effective rate to measure return on investment rather than the simple interest rate. Compound

Compound interest is a more detailed measure of the borrowing as it includes the Simple Interest Rates along with the pri

The more often the interest is compounded the more is the interest earned or paid as the amount is accumulated with eve

Question 10

The commonly used annuities are Lease rent payments or Life insurance premiums

Cash Inflow 12000

Period 25 Years
Rate 6%

PV = PMT x ((1 – (1 / (1 + r) ^ -n)) / r)

PMT = the amount in each annuity payment (in dollars)
R= the interest rate
n= the number of payments to receive

PV 12000*((1-(1/(1+0.06)^25-25))/0.06)
Present Value 5153400.274

Question 11

EAR is the rate of interest which is equivivalne to per annum rate when interest are compounded annually, semi annually o

Effective Annual Rate = (1 + (Annual Precentage Rate / number of compounding

periods)) ^ (number of compounding periods) – 1
Given,
APR = 7%
Period = Monthly

EAR (1+(0.07/12))^(12)-1
EAR 7.23%

Question 12

The holding period return is total return from income and gain over a specific period of time expressed as a precentage on

HPR = ((Dividend + (Sale Price - Purchase Price)) / Purchase Price) * 100

HPR ((2.5+(26.5-23))/23)*100
HPR 26.09

Profit

Sale 26.5
Purchase Value 23
3.5
Dividend 2.5
Total Profit 6
Franking Credit 0.23
Net Profit 5.77

Question 13

Investment Amount Return Proportion

25000 30% 0.14
50000 40% 0.27
100000 20% 0.54
10000 10% 0.05
185000 1

Expected Return = Proportion*likely retrun

Expected Return 0.14*30%+0.27*40%+0.54*20%+0.05*10%
Expected Return 26.22%
ll three options
e interest rate. Compounding interest is more beneficial even if the rate is lower than simple interest rates

st Rates along with the principal amount.

nt is accumulated with every time period and the calculation is done on the revised amount.

d annually, semi annually or half yearly. Therefore it shows the actual effective rate consng the compounding effects which is absent in
ressed as a precentage on original investment
g effects which is absent in case of annual Precentage Rates. Therefore it can be effective tool to quote EAR rather than APR to evalua
rather than APR to evaluate and decision making