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Summative Test Perpetuity and Capitalization

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43 views6 pages

Summative Test Perpetuity and Capitalization

Uploaded by

Amethyst Chiong
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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_____________________________________________________________________

Summative Test on Perpetuity and Capitalization


Name: Lucina Mae B. Chiong MM8: Mathematics of Investment

CNU ID No.: 20-000572 Date: November 24, 2021


______________________________________________________________________
Do as directed. Show your solutions:

1. Assuming that Janell holds a perpetual bond that generates an annual payment of $500
each year. He believes that the borrower is creditworthy and that an 8% interest rate will
be suitable for this bond. Compute the PV for this perpetuity.

Given: Periodic Payment or Payment per time period (C) = $500


Interest rate per time period (r) = 8% = 0.08
Required: Present value of a perpetuity (PV)
Solution/Answer: PV = Periodic payment / Interest rate per time period
PV = C/r
PV = $500/0.08
PV = $6,250

2. Matthew a businessman, invested in a company that will pay him a dividend of $8,000
per share annually. He expects a 6% growth rate in the annual payments. Given the
possible risks, Jacob expects a valuation of a 16% discount rate of 16%. Calculate the
value of a share under the above assumptions.

Given: Periodic Payment or Payment per time period (C) = $8,000


Annual interest rate (r) = 16% = 0.16
Rate of growth of cash flows (g) = 6% = 0.06
Required: Present value of a growing perpetuity (PV)
Solution/Answer: PV (growing perpetuity) = C/r-g
PV (growing perpetuity) = $8,000/0.16-0.06
PV (growing perpetuity) = $8,000/0.10
PV (growing perpetuity) = $80,000
3. Find the present value in pesos, of a perpetuity of P15,000 payable semi-annually if
money is worth 8% compounded quarterly.

Given: Periodic Payment or Payment per time period (C) = ₱15,000.00 (semi-annually
Interest rate per time period (r) = 8% = 0.08 (quarterly)
Required: Present value of a perpetuity (PV)
Solution/Answer:

(1 + r/4)⁴ = (1 + r)²

(1 + 0.08/4)⁴ = (1 + r)²

(1 + 0.08/4)² = (1 + r)

1 + r = 1.0404

r = 1.0404 – 1

r = 0.0404

PV = Periodic payment / Interest rate per time period


PV = C/r
PV = ₱15,000.00/0.0404
PV = ₱371,287.13

4. An item is purchased for P100,000. Annual cost is P18,000. Using interest rate of 8%,
what is the capitalized cost of perpetual service?

Given: First Cost (FC)= ₱100,000.00


Operations And Maintenance (OM) = ₱18,000.00
Interest Rate per Conversion Period (i) = 8% = 0.08

Required: Capitalized Cost (K)

Solution/Answer:

K = FC + OM/i

K = ₱100,000.00 + ₱18,000.00/0.08

K = ₱100,000.00 + ₱225,000.00
K = ₱325,000.00

5. A corporation uses a type of motor which costs P5,000 with 2 life years and final salvage
value of P800. How much could the corporation afford to pay for another type of motor
of the same purpose whose life is 3 years a with a final salvage value of P1,000. Money is
worth 4%.

Given:
First type of motor:
First Cost (FC1)= ₱5,000.00
Salvage Value (SV1) = ₱800.00
Interest Rate per Conversion Period (i) = 4% = 0.04
n=2

Second type of motor


Salvage Value (SV2) = ₱1,000.00
Interest Rate per Conversion Period (i) = 4% = 0.04
n=3

Required: First Cost of the second type of motor (FC2)


Solution/Answer:

Let:
AC1 = annual cost of the first type of motor
AC2 = annual cost of the second type of motor

AC1 = (FC1) (i)+ [(FC1 - SV1) (i)]/ (1 + i)^n – 1

AC1 = (₱5,000.00) (0.04) +[ (₱5,000.00 - ₱800.00) (0.04)]/ (1 + 0.04)² – 1

AC1 = ₱2,258.82

AC2 = (FC2) (i)+ [(FC2 - SV2) (i)]/ (1 + i)^n – 1

AC2 = (FC2) (0.04) + [(FC2 - ₱1,000.00) (0.04)]/ (1 + 0.04)³ – 1

AC1 = AC2

₱2,258.82 = (FC2) (0.04) + [(FC2 - ₱1,000.00) (0.04)]/ (1 + 0.04)³ – 1

₱2,258.82 = 0.04 FC2 + 0.32 FC2 – 320.35


FC2 = ₱7,164.36

6. A motorcycle costs P50,000 and has an expected life of 10 years. The salvage value is
estimated to be P2,000 and annual operating cost is estimated at P1,000. What is the
appropriate rate of return on the investment if the annual revenue is P10,000?

Given: First Cost (FC)= ₱50,000.00


Operations And Maintenance (OM) = ₱1,000.00
Salvage Value (SV) = ₱2,000.00
Capitalized Cost (K) = ₱10,000.00
n = 10
Required: Interest Rate per Conversion Period (i)
Solution/Answer:

K = FC + OM/i + (RC – SV) / (1 + i)^n – 1


₱10,000.00 = ₱50,000.00 + ₱1,000.00/i + (₱50,000.00 – ₱2,000.00) / (1 + i)^10 – 1
i = 0.1272 or 12.72%

7. At 6%, find the capitalized cost of a bridge whose cost is P250M and life is 20 years, if
the bridge must be partially rebuilt at a cost of P100M at the end of each 20 years.

Given: First Cost (FC)= ₱250M


Replacement Cost (RC) = ₱100M
Interest Rate per Conversion Period (i) = 6% = 0.06
n = 20
Required: Capitalized Cost (K)
Solution/Answer:

K = FC + OM/i + (RC – SV) / (1 + i)^n – 1

K = ₱250M + ₱0 + (₱100M – ₱0)/ (1 + 0.06)^20 – 1


K = ₱295,307,595.00

8. A new broiler was installed by a textile plant at a total cost of P300,000 and projected to
have a useful life of 15 years. At the end of its useful life, it is estimated to have a salvage
value of P30,000. Determine its capitalized cost if interest is 18% compounded annually.

Given: First Cost (FC)= ₱300,000.00


Salvage Value (SV) = ₱30,000.00
Interest Rate per Conversion Period (i) = 18% = 0.18
n = 15
Required: Capitalized Cost (K)
Solution/Answer:

K = FC + OM/i + (RC – SV) / (1 + i)^n – 1

K = ₱300,000.00 + ₱0 + (₱300,000.00 – ₱30,000.00)/ (1 + 0.18)^15 – 1

K = ₱300,000.00 + ₱24,604.17377

K = ₱324,604.17

9. A man planned of building a house. The cost of construction is P500,000 while annual
maintenance cost is estimated at P10,000. If the interest rate is 6%, what is the capitalized
cost of the house?

Given: First Cost (FC)= ₱500,000.00


Operations And Maintenance (OM) = ₱10,000.00
Interest Rate per Conversion Period (i) = 6% = 0.06

Required: Capitalized Cost (K)

Solution/Answer:

K = FC + OM/i
K = ₱500,000.00 + ₱10,000.00/0.06

K = ₱500,000.00 + ₱166,666.6667

K = ₱666,666.67

End!

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