MA2- Managing Costs & Finances

Discounted Cash Flows

Class practice question

1 A building society adds interest monthly to investors' accounts even though interest rates are expressed in
annual terms. The current rate of interest is 9% per annum.

An investor deposits $10,000 on 1 January 2013. How much interest will have been earned by 30
December 2017?

2 A building society adds interest quarterly to investors' accounts even though interest rates are expressed
in annual terms. The current rate of interest is 6% per annum.

An investor deposits $50,000 on 1 January 2012. How much interest will have been earned by 30
December 2015?

3 If a single sum of $15,000 is invested at a simple interest rate of 8% per annum.

What is the amount to which the principal will have grown by the end of year seven?

4 If a single sum of $18,000 is invested at 10% per annum with interest compounded quarterly.

What is the amount to which the principal will have grown by the end of year nine?

5 If a single sum of $30,000 is invested at 8% per annum with interest compounded quarterly.

What is the amount to which the principal will have grown by the end of year three?

6 If $12,000, $20,000 and $30,000 are invested at the start of year 1, 2 and 3 respectively with interest rate
of 8% per annum compounded quarterly,

What is the total amount to which the principals will have grown by the end of year five?

7 If $20,000, $50,000 and $80,000 are invested at the start of year 1, 3 and 5 respectively with interest rate
of 8% per annum compounded monthly,

What is the total amount to which the principals will have grown by the end of year seven?

8 A six-year investment yields a return of 12% per annum. The cash returned from the investment,
including principal and interest, is $5,000. What is the interest amount?

9 A three-year investment yields a return of 8% per annum. The cash returned from the investment,
including principal and interest, is $9,000. What is the principle amount?

Prepared by: Muzzamil Malik Page 1

 MA2- Managing Costs & Finances
10 A sum of money was invested for 10 years at 7% per annum and is now worth $2,000.

What was the original amount invested (to the nearest $)?

11 Which is worth most, at present values, assuming an annual rate of interest of 8%?

A $1,200 in exactly one year from now

B $1,400 in exactly two years from now
C $1,600 in exactly three years from now
D $1,800 in exactly four years from now

12 Which is worth most, at present values, assuming an annual rate of interest of 15%?

A $1,200 in exactly one year from now

B $1,400 in exactly two years from now
C $1,600 in exactly three years from now
D $1,750 in exactly four years from now

13 A bank offers depositors a nominal rate of 4% per annum, with interest payable quarterly.

What is the effective annual rate of interest?

14 A bank offers depositors a nominal rate of 9% per annum, with interest payable monthly.

What is the effective annual rate of interest?

15 House prices rise at 2% per calendar month.

What is the annual rate of increase correct to one decimal place?

16 Investment Wye offers one interest payment of 20% at the end of its four-year life.

What is the annual effective interest rate offered by the investment?

17 House prices rise at 2% per quarter.

What is the annual rate of increase correct to one decimal place?

18 What is the present value of ten annual payments of $700, the first paid at end of year 1 and discounted
at 8%, giving your answer to the nearest $?

19 What is the present value of fifteen annual payments of $1,000, the first paid immediately and
discounted at 15%, giving your answer to the nearest $?

Prepared by: Muzzamil Malik Page 2

 MA2- Managing Costs & Finances
20 An investor is to receive an annuity of $19,260 for six years commencing at the end of year 1. It has a
present value of $86,400.

What is the rate of interest (to the nearest whole percent?

A 3%
B 6%
C 9%
D 12%

21 How much should be invested now (to the nearest $) to receive $24,000 per annum in perpetuity if the
annual rate of interest is 5%?

22 How much should be invested now (to the nearest $) to receive $2,000 per annum in perpetuity if the
annual rate of interest is 2%?

The following data is relevant for questions 23 to 28

Diamond Ltd has a payback period limit of three years and is considering investing in one of the following
projects. Both projects require an initial investment of $800,000. Cash inflows accrue evenly throughout
the year.

Project Alpha Project Beta

Year Cash inflow Year Cash inflow
$ $
1 250,000 1 250,000
2 250,000 2 350,000
3 400,000 3 400,000
4 300,000 4 200,000
5 200,000 5 150,000
6 50,000 6 150,000

The company's cost of capital is 10%.

23 What is the net present value of Project Beta?

24 What is the net present value of Project Alpha?

25 What is the non-discounted payback period of Project Beta?

26 What is the discounted payback period of Project Alpha?

27 What is the non-discounted payback period of Project Alpha?

28 What is the discounted payback period of Project Beta?

29 An investment project has a positive net present value (NPV) of $7,222 when its cash flows are
discounted at the cost of capital of 10% per annum. Net cash inflows from the project are expected to be
$18,000 per annum for five years. The cumulative discount (annuity) factor for five years at 10% is 3.791.

What is the investment at the start of the project?

Prepared by: Muzzamil Malik Page 3

 MA2- Managing Costs & Finances
30 A machine has an investment cost of $80,000 at time 0. The present values (at time 0) of the expected
net cash inflows from the machine over its useful life are:

Discount rate Present value of cash inflows

10% $84,600
15% $78,200
20% $72,100

What is the internal rate of return (IRR) of the machine investment?

31 A project requiring an investment of $1,200 is expected to generate returns of $400 in years 1 and 2 and
$350 in years 3 and 4. If the NPV = $22 at 9% and the NPV = –$4 at 10%,

What is the IRR for the project?

The following data is relevant for questions 32 to 34

A company is considering an investment of $400,000 in new machinery. The machinery is expected to
yield incremental cash flow over the next five years as follows:

Year Cash flow ($)

1 175,000
2 225,000
3 340,000
4 165,000
5 125,000

The company's cost of capital is 10%.

Thereafter, no incremental cash flows are expected and the machinery will be sold. The machinery is
expected to have a value of $50,000 at the end of year 5.

32 What is the non-discounted payback period of the investment in this machinery?

33 What is the discounted payback period of the investment in this machinery?

33 What is the NPV of the investment in this machinery?

34 A bank offers different bank accounts with different interest rates:

Bank account 1 = 10% interest per year, interest calculated quarterly

Bank account 2 = 12% interest per year, interest calculated monthly
Bank account 3 = 1.2% interest per month
Bank account 4 = 3% interest per quarter

Which account gives the highest annual effective interest rate?

Prepared by: Muzzamil Malik Page 4