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Assignment 1-1

The document outlines various financial scenarios involving investment returns, retirement planning, loan repayment, education funds, business expansion, savings strategies, debt repayment, retirement withdrawal strategies, and bond investments. Each scenario includes specific financial concepts such as present value, future value, annuities, and interest rates. The document aims to evaluate whether the proposed financial actions are viable based on the required rates of return and projected cash flows.

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amoaeed.za
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3 views

Assignment 1-1

The document outlines various financial scenarios involving investment returns, retirement planning, loan repayment, education funds, business expansion, savings strategies, debt repayment, retirement withdrawal strategies, and bond investments. Each scenario includes specific financial concepts such as present value, future value, annuities, and interest rates. The document aims to evaluate whether the proposed financial actions are viable based on the required rates of return and projected cash flows.

Uploaded by

amoaeed.za
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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1.

Real Estate Investment Return


Sarah is considering purchasing a commercial property worth $600,000. She plans to rent it
out, generating $50,000 per year for the next 10 years. However, the rental income will be
collected at the beginning of each year. After 10 years, she plans to sell the property for
$900,000. If Sarah requires a 7% annual return on her investment, should she proceed with
this deal? What is the present value of her expected cash flows?

Concepts: Present Value, Annuity Due, Future Value

2. Retirement Planning with Delayed Contributions


John is 35 and wants to retire at 60. He plans to start saving $15,000 per year starting at age
40, with contributions made at the end of each year until retirement. John expects an annual
return of 6%. How much will he have saved by retirement? If he wants to receive $60,000 per
year for 20 years in retirement (with withdrawals at the beginning of each year), what should
be the present value of his retirement fund at age 60 to support this? Will his savings be
sufficient?

Concepts: Future Value of Ordinary Annuity, Present Value of Annuity Due

3. Loan Repayment Period


Lisa has taken out a loan of $250,000 to purchase a car, with an annual interest rate of 5%.
She plans to make annual payments of $20,000, starting at the end of the first year. How long
will it take her to pay off the loan completely? Provide the total number of years required.

Concepts: Present Value of Ordinary Annuity, Finding Number of Years

4. Education Fund with Multiple Contributions


A family plans to set aside $10,000 per year for their child’s college education, starting when
the child is 5 years old. Contributions will be made annually at the beginning of each year for
12 years. The education fund will grow at a rate of 8% per year. When the child turns 18, the
parents plan to withdraw $30,000 annually for 4 years to cover tuition costs. Will the family
have enough funds for the tuition payments? What is the value of the fund when the child
turns 18, and how much will be left after tuition is paid?

Concepts: Future Value of Annuity Due, Withdrawals, Balance

5. Business Expansion and Return Evaluation


A company is planning a business expansion that requires an investment of $500,000. The
expansion is expected to generate annual cash inflows of $70,000 for 12 years, with cash
inflows received at the end of each year. If the company’s required rate of return is 8%,
calculate the present value of these inflows. Should the company proceed with the investment
based on the net present value (NPV) approach?

Concepts: Present Value of Ordinary Annuity, NPV


6. Savings for a Future Purchase
Tom is planning to purchase a vacation home in 8 years, which he estimates will cost
$300,000. To save for this, he plans to make annual contributions to an investment account,
starting today, and expects a return of 6% per year. What should his annual contribution be to
meet his goal?

Concepts: Future Value of Annuity Due, Annual Payment Calculation

7. Investment with Quarterly Contributions


Anna wants to accumulate $100,000 over the next 5 years to start her own business. She
plans to invest a certain amount at the end of each quarter in an account that offers an annual
interest rate of 4%, compounded quarterly. How much should she invest each quarter to reach
her goal?

Concepts: Future Value of Ordinary Annuity, Quarterly Compounding, Payment Calculation

8. Debt Repayment and Interest Rate Calculation


A company owes $400,000, which it plans to repay in equal annual installments over 15
years. The first payment is due one year from today. After some research, the company finds
out that the total of all the payments will amount to $720,000. What is the interest rate on this
loan?

Concepts: Present Value of Ordinary Annuity, Finding Interest Rate

9. Retirement Withdrawal Strategy


David has saved $1 million for retirement. He plans to withdraw $80,000 annually, starting
today, for the next 20 years. If his retirement fund earns an annual interest rate of 5%, will his
savings last for the entire period? Calculate the present value of his annuity and determine if
the savings will be enough to cover all the withdrawals.

Concepts: Present Value of Annuity Due, Withdrawal Strategy

10. Bond Investment and Future Value Analysis


A corporation is considering investing $100,000 in bonds that pay 6% annual interest,
compounded semi-annually. The bonds will mature in 7 years, and the corporation plans to
reinvest the interest payments into another account offering a 5% return, compounded
annually. What will be the future value of the total investment at the end of 7 years?

Concepts: Future Value, Compounded Interest, Reinvestment

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