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Financial Questions: Payment, Interest, Savings Account, Present Value, Cashflows

## Question 1

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:

1. Invested for 6 years
2. 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:

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

1. Find the equal quarterly payment amount.
2. Draw the amortization schedule for the loan repayment.
3. What is the interest portion paid on the 5th payment?
4. What is the total interest paid after the 15th payment?
5. 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:

1. shares and other equity-type finance
2. 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)