Question

QUESTION 1

Smash Ltd, a company specialising in the production of cricket bats, is analysing the potential cash flows from the opportunity to purchase additional machinery
to meet increased demand, due to increased interest in the sport as a result of the upcoming T20 World Cup. The bats will be sold at major sporting retailers throughout the country.

The following potential cash flows have been provided:

YEAR	CASH FLOWS
1	R 11 500 000
2	R 14 300 000
3	R 10 250 000
4	R 4 750 000
5	R (3 125 000)

Smash Ltd’s opportunity cost is 16% per annum.

REQUIRED:

(a) Calculate the present value of the cash flows of Smash Ltd using the financial tables assuming that the cash flows will occur at the end of each year.

(b) Calculate the future value of the cash flows of Smash Ltd using the financial tables assuming that the cash flows will occur at the beginning of each year.

QUESTION 2

Mr Baxter is planning on travelling with his family to the Soccer World Cup semifinals and final in North America in six years time and would like to start saving today towards the cost of the trip. Victory Ltd, an international sports tour operator has estimated that the cost for him and his family in six years time would amount to R 350 000 in total. This would include the cost of the flights, accommodation and stadium tickets. He has approached you, his financial advisor, on the best way to go about saving for this trip.

REQUIRED:
If Mr Baxter could invest a lump sum of R 75 000 today in a fixed deposit offering ten percent (10%), compounded bi‐annually. In addition to this he will save on a monthly basis. Calculate the amount he would then need to deposit monthly at the beginning of each month in an annuity offered by Bucks Assets Managers at an interest rate of eighteen percent (18%) per annum compounded monthly, in order to make up the shortfall.

QUESTION 3

Mr Hamilton would like to purchase a vehicle for his son’s 21st birthday. If the vehicle costs R225 000 and the dealership requires a twenty percent (20%) deposit with monthly repayments at an interest rate of 15% compounded monthly over five years, how much sooner would Mr Hamilton be able to repay the loan agreement if he decided to offer a twenty five percent (25%) deposit and kept the monthly instalments the same as originally calculated with the deposit requested by the dealership.

Answer 1

Answer Case 1 when cash flows are recived fter the end of each year

Value = 28,243,293

If cash flows are received at the begning of the year (First year cash flow PVF will be 1)

Value = 32,762,220

Calculations are shown below

CI	PVF (16%	PVCI
$                         11,500,000	0.86207	$             9,913,793
$                         14,300,000	0.74316	$            10,627,229
$                         10,250,000	0.64066	$             6,566,741
$                          4,750,000	0.55229	$             2,623,383
$                         (3,125,000)	0.47611	$            (1,487,853)
	Total	$            28,243,293
CI	PVF (16%	PVCI
$                         11,500,000	1	$            11,500,000
$                         14,300,000	0.86207	$            12,327,586
$                         10,250,000	0.74316	$             7,617,420
$                          4,750,000	0.64066	$             3,043,124
$                         (3,125,000)	0.55229	$            (1,725,910)
	Total	$            32,762,220