Chapter 8 Financial Mathematics AAMS1773

Tutorial 8 (extra)
1. Mr. Lee invests RM 500 in an account paying 6% p.a. on 1st January and 1st July every year, beginning on 1st January 2004. Find the total amount in his account on 31st December 2006. [answer: RM3331.23] 2. RM 8000 will be invested for 5 years 9 months. If the investment will yield 7% p.a. compounded semi-annually for the first three years and 8% p.a. compounded monthly for the rest of the period, find the maturity value at the end of the investment period. [RM12245.03] 3. At what rate of simple interest will a sum of money triple itself in five years? [answer: 40%] 4. An investment project is being considered which has an initial cost of RM 20000. The associated revenues over the four years are RM 15000, RM 13000, RM 10000 and RM 8600 respectively. The project costs over the four years are estimated as RM 6000, RM 4500, RM 2500 and RM 1300 respectively. If the discount rate is 14%, calculate the net present value (NPV) for the project and comment on your result. [answer: NPV=3820.38] 5. A man borrows RM 60000 from a bank that charges him interest rate of 15% p.a. compounded monthly. If he repays back at the end of each month over 6 years, find his monthly repayment. [answer: RM1268.70] 6. In an arithmetic progression, the 3rd terms 10 and sum of the first 6 terms is 75. Find the 8th term. [answer: 35] 7. Charles owns a cyber game arcade. A manufacturer developed a new line of games and offered low interest financing to encourage arcade owners such as Charles to install the new games. Charles was able to finance RM 50,000 worth of games for 9 months at simple interest rate of 3.5% p.a. (i) How much interest did Charles pay? (ii) What was the total amount Charles would repay? [answer: (i) RM1312.50 (ii) RM51312.50]

Chapter 8 Financial Mathematics AAMS1773 8. Anis plans to invest RM 1,000 in an individual retirement arrangement today at the interest rate of 6% p.a. How much will Anis have in the account at the end of 20 years if interest is compounded (i) Semiannually? (ii) Daily? (Assume a 360-day year) [answer: (i) RM3262.04 (ii) RM3319.79] 9. A firm is considering to purchase a fixed asset at initial investment of RM 25,000. Given that the asset generates an annual after-tax cash flow of RM 8,000 for 4 years. (i) Determine the net present value (NPV) of the asset, assuming that the firm has a 12% p.a. cost of capital. (ii) Is the investment acceptable? Why? [answer: (i) NPV= -701.21 (ii) The project has a negative NPV. Project earns less than the discount rate and makes a loss. Therefore it is not worthwhile to invest 10. A debt of RM 2,000 will mature in 3 years time. Find the present value of this debt, if the money is worth 10% p.a. compounded semi-annually. [answer: RM1492.43] 11. A credit card centre charges interest of 15% per annum on outstanding balances at the end of the month. If the interest is compounded monthly, calculate the Annual Percentage Rate (APR) charged by the centre. [answer: 16%] 12. Find the minimum number of terms that must be taken from the sequence 3, 5, 7, 9, so that the sum is more than 48. [answer: n=7] 13. Mary bought a condominium for RM300,000 today. She paid a 20% down-payment and took a 10 years bank loan for the remaining amount. The bank charges 6% p.a. compound interest on a reducing balance basis on property loans. Mary is to reply the loan by equal monthly installments, the first repayment is one month from today. Calculate the amount of each installment to be paid by Mary. [answer: RM2664.49]

Chapter 8 Financial Mathematics AAMS1773 14. An investment costing RM50,000 has the following year-end net cash flows for 3 years. Year Net Cash Flow 1 RM30,000 2 RM20,000 3 RM10,000 Calculate the net present value (NPV) for the investment if the cost of capital is 6% p.a.. Is the investment worthwhile? Justify your answer. [answer: NPV= RM4498. The project has a positive NPV. Project earns more than the discount rate and profitable. Therefore it is worthwhile to invest] 15. A bank offers a refinancing package to its customers by charging interest of 4.8% p.a. compounded monthly. Calculate the actual percentage rate (APR) charged by the bank. [answer: 4.907%] 16. You invested RM20,000 in a fixed deposit account for 5 years with interest rate of 4% p.a. compounded quarterly for the first 3 years and 3.6% p.a. compounded monthly for the last 2 years. You withdrew RM5,000 at the end of 3 years. Calculate the maturity value of your investment at the end of 5 years. [answer: RM18843.66] 17. The following table shows the Customer Price Index (CPI) and the monthly incomes for Mr. Lee. Year CPI (2005 = 100) Monthly income (RM) 2005 100 2200 2008 155 3050 (i) Calculate the real monthly income of Mr. Lee for the year 2008. (ii) Calculate the purchasing power of one ringgit in year 2008, base on the year 2005 and interpret your result. [answer: (i) RM1967.74 (ii) RM0.65 18. A couple intends to purchase a property in 6 years time. The husband will invest RM200,000 into a fixed deposit account earning compound interest of 4% per annum for the first 3 years and 4.5% per annum for the remaining 3 years. The wife will invest RM20,000 at the beginning of each year into a fund for six years at an interest rate of 4% compounded annually. Find the value of the investment in 6 years time. [answer: RM394,697.23]

Chapter 8 Financial Mathematics AAMS1773 19. A project has the following cash flows: Year 0 1 2 3 4 Cash outflow (RM000) 400 100 100 50 50 Cash inflow (RM000) 150 200 300 200 Calculate the net present value (NPV) of the project if the cost of capital is 6%per annum. Decide whether it is worthwhile to invest into this project and state your reason. [answer: NPV=RM64885. The project has a positive NPV. Project earns more than the discount rate and profitable. Therefore it is worthwhile to invest] 20. Mr. Wong has decided to invest a certain sum of money into a savings account earning 3.6% per annum compound interest. This investment will allow him to withdraw RM5,000 at the end of the first year and RM10,000 at the end of the second year. (i) Find the amount Mr. Wong must invest into the account at the present. (ii) If the interest earned in part (i) is compounded monthly, find the actual percentage rate (APR) earned by Mr. Wongs investment. [answer: (i) RM14143.35 (ii) 3.66%] 21. A factory manager has planned monthly production to start at 5,000 units for the first month. He has targeted production to reach 10,368 units in the fifth month. Assuming that production follows a geometric progression, find the percentage increase per month for production to achieve this target in the fifth month. [answer: 20%] 22. How much did a man borrow, if his repayment at the end of each quarter is RM1,500 to be paid over 10 years at 10.5% per annum compounded quarterly? [answer: RM36874]

Chapter 8 Financial Mathematics AAMS1773 23. A manufacturing company has two options for acquiring its manufacturing equipment. The equipments life span is 5 years. The equipment can be purchased by installment or by leasing. The payment schedule is given in the table below. Year Installment (RM) Leasing (RM) 0 10000 1 90000 75000 2 90000 75000 3 90000 75000 4 90000 75000 5 90000 75000 The equipment at the end of its life can be sold for RM200,000 if it is purchased. The discount rate is 20%. Using the net present value criterion, advise the company on the best option. [answer: Since the NPV of the costs for purchase is higher, therefore the company should purchase the equipment instead of leasing] 24. A debts of RM5,000 will mature in 4 years time. (i) Find the present value of this debt, if the money is worth 8% p.a. compounded semiannually. (ii) Calculate the Actual Percentage Rate (APR). [answer: (i) RM3653.45 (ii) 8.16%] 25. For an arithmetic progression, the 2nd term is 10, and the sum of the first five terms is 75. Find the 10th term. [answer: 50] 26. For the progression 0.2, 0.02, 0.002, , find the first term and the common ratio. Hence, determine the sum of the first 8 terms. (Round off your answer to 4 decimal places) [answer: 0.2222] 27. (i) Mrs Lee has decided to invest a single sum of money today to enable her to withdraw RM3,000 in 3 years and a further RM5,000 in 5 years from today. Compute the single sum Mrs Lee must invest today earning 4.8% per annum interest compounded monthly to enable her to make the withdrawals in the future. (ii) Calculate the effective annual rate of interest for Mr Less investment. [answer: (i) RM6533.43 (ii) 4.91%]

Chapter 8 Financial Mathematics AAMS1773 28. Today Mr Lee bought a property and paid a 10% down-payment. He took a 10 years bank loan to finance the remaining amount of the purchase price. The loan interest charged by the bank is 6% per annum compounded monthly. Mr Lee is to repay the loan by equal monthly installments of RM4995.92 the first to be paid in one month from today. Calculate the purchase price of the property. [answer: RM500000] 29. Mr Lee has to decide whether to invest into a project costing RM300,000. The year-end met cash flows for the project are as follows: Year Net Cash flow 1 RM100,000 2 RM100,000 3 RM200,000

Calculate the net present value (NPV) for the project if Mr. Lees cost of capital is 8% p.a. Is the investment worthwhile to Mr. Lee? Justify your answer. [answer: NPV=RM37080. The NPV is positive showing it will be earning more than 8% discount rate. Therefore, it is worthwhile to invest.