Question

Question 1
R&B Co. Ltd. is planning to build market stores on a Build-Operate-Transfer (BOT) arrangement for the
Sunyani Municipal Assembly. The total cost of the project is estimated at GHȼ 450, 650.00. The
estimated monthly net operating income (NOI) for the investment is GHS3, 500.00 with operating period
of 15 years after which the stores would be transferred to the Assembly.
a. With a detailed numerical analysis, explain the financial justification for this investment given
that GoG’s one-year Treasury bill rate is 24% p.a.
b. Given that inflation will average 12% over the next fifteen years, show (numerically) how the
investor may replicate the same project for another assembly at the end of the fifteen years,
without using loan, if money can be invested at 24% p.a.
c. Analyse the feasibility of your recommended approach in c using the project’s NOI.
Question 2
The price of a Daewoo Matiz taxi cab is GH¢20,000. The expected rate of return for such investments is
15% p.a.
a. Estimate the annual cash returns (annuities) to the investor if the economic life of the cab is five years
b. If the investor reinvests the return of capital into an account which pays 10% interest p.a.,
ascertain how much would be available for replacing the vehicle at the end of the fifth year. NB:
Return of capital is obtainable from amortization schedule.
c. Explain the financial feasibility of the decision in b if inflation averages 5% p.a. over the five year period.
Question 3
a. Explain the relationship between bond price and market yield.
b. What is the difference between the following pair of concepts?
i. Accumulation and discount factors at compound interest
ii. Nominal and real growth rate

Answer 1

Question 2

A) Price of cab = GH 20,000, expected rate of return = 15% pa

annual rate of return = 15% of 20,000 = GH 3000, returns for 5 years = 3000 * 5 = GH 15,000

B) At rate of 10%pa returns are GH 300pa so after 5 years it becomes 300 * 5 = 1500

total returns is = returns from cab + returns from account = 15,000 + 1500 = GH 16,500

C) Counting Inflation in by 5% pa the new retuns come about = GH 15,750

Question 3

A) Bond price is the present value of future cash flows from a bond investment. Market yield is the returns the investor gets on particular coupon rate investin in bonds. For a higher yield on maturity either the coupon rate or bond price should be high. A higher bond price will result in higher maturity.

B) 1 Accumulation and discount factors -

Accumulation factors are the factors which accumulate or compound the overall interest in the investment to get more interest. Discounting factors are the factors which discount or show the present value of future cash flows.

2 Nominal and Real growth -

Real growth is a growth rate which takes inflation into account for calculating the actual growth rate for the economy or any investment, where as the nominal growth rate is a rate which does not count inflation in its calculation.