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Topic 2 - Solutions to Additional Questions

The document provides definitions and calculations related to the Time Value of Money, including concepts such as present value, future value, annuities, and discounting. It includes specific formulas for calculating future values and present values, as well as example calculations with results. Additionally, it presents a series of answers to calculation questions related to these concepts.

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0 views

Topic 2 - Solutions to Additional Questions

The document provides definitions and calculations related to the Time Value of Money, including concepts such as present value, future value, annuities, and discounting. It includes specific formulas for calculating future values and present values, as well as example calculations with results. Additionally, it presents a series of answers to calculation questions related to these concepts.

Uploaded by

mhambinamhla
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Section A: Time Value of Money Definitional Questions - ANSWERS

1. The beginning value of an account or investment in a project is known as its present


value

2. Using a savings account as an example, the difference between the account’s


present value and its future value at the end of a period is due to interest earned
during the period.

3. The equation FVn = PV (1 + k)n determines the future value at the end of n periods.
The factor (1 + k)n is known as the future value interest rate factor.

4. The process of finding present values is often referred to as discounting and is the
reverse of the compounding process.

5. For a given number of time periods, the PVIFk,n will decline as the interest rate
increases.

6. A series of payments of a fixed amount for a specified number of periods is an


annuity. If the payments occur at the end of each period it is an ordinary annuity,
while if the payments occur at the beginning of each period it is an annuity due.
Section B: Time Value of Money Calcualtion questions

1. D
2. A
3. C
4. C
5. B
6. D
7. E
8. A
9. D
10. C
11. B
12. C
13. E

Workings to Section B

1. FV = PV (1 + i)n
= 1 000 x 1.086
= R1 586.87

2. FV = (1.04)12 x 1 000
= R1 601.03
Difference = R1 601.03 – R1 586.87
= R14.16

3. r = (FV/PV)I/2 – 1
= (600/500)0.5 – 1
= 9.5%

4. r = (FV/PV)I/n – 1
= (2/1)0.2 – 1
= 14.87%

5. FV = Ax (I + i)n - 1
I
= 1 000 x (1.06)5 - 1
0.06
= R5 637.09

6. FV = A x (I + i)n+1 – 1 -1
i
1 000 x (1.06)6 – 1 -1
0.06
= R 5 975.33

7. FV = A x (I + i)n – 1
i
= 500 x (1.03)10 – 1
0.03
= R5 731
FV n
8. PV = / (I+i)
1 000 8
= / 1.07
= R582.01

9. PVA = A x 1 – I/(I+i)n
i
= 800 x 1 – 1/1.056
0.05
= 800 x 5.07569208
= R4 060.55

10. A = FVA
n
11. (I+i) – 1 FV = 7 500
i n = 5 x 2 = 10
7 500
=
n 6
(1 + 0.03) –1 i = /3 = 3%
0.03

= R654.22

Year CF PVIF PV
0 0 1 0
1 2 000 0.893 1 786
2 2 000 0.797 1 594
3 2 000 0.712 1 424
4 3 000 0.636 1 908
5 -4 000 0.567 -2 268
NPV R 4 444

12. iEFF = (1 + i/m)m – I


= 1 + 0.12/12)12 – 1
= 12.68%

13. FV = PV x (I + i)n
= 1 000 x (1.16)2
= R1 345.60

FV = PV x (I + i/m)mxn
= 1 000 x (1 + 0.16/4)2x4
= R1 368.57

Difference = 1 368.57 – 1 345.60


= R 22.97

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