Question 1
a) A company is due to receive a payment of £500,000 from a customer in 6 months’ time. To smooth its cashflows, the company would prefer to receive the payment immediately, and has agreed to transfer its entitlement to this payment to a third party (a discount house) in return for an immediate payment calculated using a rate of commercial discount of 16% per annum.
How much will the immediate payment made by the discount house be?
b) An investor puts £5,000 in a savings account that pays 10% simple interest at the end of each year. Compare how much the investor would have after 6 years if the money was: i. Invested for 6 years ii. Invested for 3 years, then immediately reinvested for a further 3 years.
c) £250 is invested in a savings account. The nominal rate of interest convertible monthly for the first 3 months is 18% and the nominal rate of interest convertible quarterly for the next 9 months is 20%. How much is in the account at the end of the year?
d) Calculate the present value as at 1 March 2005 of a series of payments of £1,000 payable on the first day of each month from April 2005 to December 2005 inclusive, assuming a rate of interest of 6% pa convertible monthly.
e) The force of interest is given by: ??(??)= ’0.08-0.001?? 0=?? 3 0.025??-0.04 3=?? 5 0.03 ??=5 Calculate the present value at time 2 of a payment of £1,000 at time 10.
(3 + 6 + 3 + 4 + 9 = 25 Marks)
Question 2
a) A loan of £120,000 is repayable by equal quarterly payments for 5 years. The effective rate of interest is 6% pa.
REQUIRED i. Find the equal quarterly payment amount. ii. Draw the amortization schedule for the loan repayment. iii. What is the interest portion paid on the 5th payment? iv. What is the total interest paid after the 15th payment? v. What is the amount of capital portion in the 14th payment?
b) Describe briefly the investment and risk characteristics of the following types of asset available for investment purposes: i. shares and other equity-type finance ii. derivatives
(3 + 11 + 1 + 2 + 1 + 6 + 6 = 30 Marks)
Question 3
Project R delegates all the development work to outside companies. The estimated cashflows for Project R are (where brackets indicate expenditure): Beginning of Year 1 (£150,000) (contractors’ fees) Beginning of Year 2 (£250,000) (contractors’ fees) Beginning of Year 3 (£250,000) (contractors’ fees) End of Year 3 £1,000,000 (sales)
Project S carries out all the development work in-house by purchasing the necessary equipment and using the company’s own staff. The estimated cashflows for Project S are:
Beginning of Year 1 (£150,000) (New equipment) Continuous payments Through Year 1 (£75,000) (Staff Cost) Continuous payments Through Year 2 (£250,000) (Staff Cost) Continuous payments Through Year 3 (£250,000) (Staff Cost) End of Year 3 £1,000,000 (sales)
REQUIRED
a) Calculate the net present value for Project R and Project S using a risk discount rate of 20% per annum. Using net present values as a criterion, which project is preferable?
b) Find the internal rate of return for Project R and Project S and hence determine which project is more favourable using this criterion.
(9 + 16 = 25 Marks) *** End of Assignment***