SEM II 2014/2015

BWFF2043

TUTORIAL TOPIC 1: TIME VALUE OF MONEY

Q.1
A companys 2005 sales were RM100 million. If sales grow at 8% per year,
how large will they be 10 years later (in 2015), in millions?
Q.2
Joanne places RM800 in a savings account paying 6% interest compounded
annually. She wants to know how much money will be in the account at the
end of 5 years.
Q.3
Rahman has an opportunity to receive RM300 one year from now. If he can
earn 6% on his investments in the normal course of events, what is the most
he should pay now for this opportunity?
Q.4
Pamela wishes to find the present value of RM1700 that will be received 8
years from now. The opportunity cost is 8%.
Q.5
The ABC Corp. offers to sell you a bond for RM613.81. No payments will be
made until the bond matures 10 years from now, at which time it will be
redeemed for RM1,000. What interest rate would you earn if you bought this
bond at the offer price?
Q.6
Tescom Corp's 2005 earnings per share were RM2, and its growth rate
during the prior 5 years was 11.0% per year. If that growth rate were
maintained, how long would it take for Tescoms EPS to double?
Q.7
Abby wishes to determine the number of years it will take for her initial
RM1000 deposit, earning 8% annual interest, to grow to equal RM2500.
Q.8
You have a chance to buy an annuity that pays RM1,000 at the end of each
year for 5 years. You could earn 6% on your money in other investments with
equal risk. What is the most you should pay for the annuity?
Q.9
Suppose you inherited RM200,000 and invested it at 6% per year. How much
could you withdraw at the end of each of the next 15 years?

SEM II 2014/2015

BWFF2043

Q.10
Deen Company, a small producer of plastic toys, wants to determine the
most it should pay to purchase a particular ordinary annuity. The annuity
consists of cash flows of RM700 at the end of each year for 5 years. The
company requires the annuity to provide a minimum return of 8%.
Q.11
Whats the present value of a perpetuity that pays RM100 per year if the
appropriate interest rate is 6%?
Q.12
Whats the rate of return you would earn if you paid RM1,500 for a perpetuity
that pays RM105 per year?
Q.13
At a rate of 8%, what is the present value of the following cash flow stream?
RM0 at Time 0; RM100 at the end of Year 1; RM300 at the end of Year 2; RM0
at the end of Year 3; and RM500 at the end of Year 4?
Q.14
You plan to invest RM2000 a year in one of the Malaysian unit trusts for the
next 20 years. You would like to know the effect of investing this money at
the beginning of each year rather than waiting until the end of each year.
Calculate the difference in the future value of your investment at the end of
20 years as an ordinary annuity versus an annuity due, assuming a 10
percent interest rate.
Q.15
Joe borrowed RM15,000 at 14 percent annual rate of interest to be repaid
over three years. The loan is amortized into three equal annual end-of-year
payments.
a.
b.
c.

Calculate the annual end-of-year loan payment.

Prepare a loan amortization schedule, showing the interest and
principal breakdown of each of the three loan payments.
Explain why the interest portion of each payment declines with the
passage of time.