Question 1 (15 marks) This question relates to material covered in the Topics 1

Question

Question 1 (15 marks)

This question relates to material covered in the Topics 1 to 3. This question addresses the 5th and 6th subject learning outcomes.

For the following numerical problems, detailed answers must be shown. This involves providing a brief description of the problems, formulae used, progressive and final answers to the questions. For assignments you are expected to show your workings using the appropriate formula.

a.  Sandy expects to receive the following stream of cash flows from an investment over the next 5 years:

If the relevant rate of interest is 9% per annum on this investment, how much should she pay for this investment opportunity? (4 marks)

b.  Lee has taken out a loan of $100,000 with an interest rate of 10% per annum. The loan is to be paid off by 20 equal quarterly payments; the first payment is due today. How much will Lee’s quarterly payment be?. (4 marks)

c.  Dianne won a lottery prize of $200,000. She invested the entire amount and expects a yearly return of 10% per annum compounded monthly on her investment. Dianne will receive 150 equal monthly payments with the first payment due to be paid to her in exactly 2 years. Find the size of the monthly payments that Dianne will receive. (7 marks)

End of year Cash flow ($) 1 400 2 800 3 500 4 400 5 300

Explanation / Answer

a ) she should pay $ 1904.60

cash flow PV Amount $
1 400 0.917 366.9725
2 800 0.842 673.34
3 500 0.772 386.09
4 400 0.708 283.2
5 300 0.65 195
total 1904.602

b) Lee first quarterly payment will be $3914.71

where p = payment

pv = present value

r = rate of interest

n = no of period

p = r(PV) 1- (1+r) n

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