Question

1) Menke Auto Ltd invests $2.5 million at 25% for 3 years. Calculate the FV of this investment. (2.5 Marks) 2) Butcher's Ltd invests $2.5 million at 24% for 3 months. Calculate the FV of this investment. (2.5 Marks) 3) An insurance policy will pay $380,000 in 7 years' time. Assume the interest rate is 20%. Calculate the present value of such in lump sum payment. (5 Marks) 4) Karen was offered an annuity that would pay her $1000 per year for 10 years. What is the most Karen would pay for the annuity, assuming that she has a 12% time preference? (5 Marks ) 5) What is the future value of a 15 year annuity that promises to pay $3000 at the beginning of each year? Assume that all payments are reinvested at 7% a year until year 15. (5 Marks) 6) An investment pays you $100 at each of the next three years. The investment will then pay you $200 at the end of year 4, $300 at the end of year 5 and $500 at the end of year 6. If the rate of interest earn on the investment is 8% what is the present value of the investment? (10 Marks) 7) IGL is planning to borrow $400,000 on a 10 year 6% annual payment fully amortized payment term loan. Prepare the amortization schedule of the loan. (10 Marks)

Answer 1

Answer to Question 1.

Present Value = $2,500,000
Time (n ) = 3 years
Rate (r ) = 25%
Future Value = ??

Future Value = Present Value * (1 + r)^ n
Future Value = $2,500,000 * (1 + 0.25)^ 3
Future Value = $2,500,000 * 1.25^ 3
Future Value = $2,500,000 * 1.9531
Future Value = $4,882,750

Answer to Question 2.

Present Value = $2,500,000
Time (n ) = 3 months
Rate (r ) = 24% p.a. or 2% per month
Future Value = ??

Future Value = Present Value * (1 + r)^ n
Future Value = $2,500,000 * (1 + 0.02)^ 3
Future Value = $2,500,000 * 1.02^ 3
Future Value = $2,500,000 * 1.0612
Future Value = $2,653,000