Question

1 (a) You wish to save money on a regular basis to finance an exotic holiday to a country of your choice in five years. You are confident that with sacrifice and discipline, you can force yourself to deposit GHS1,000 annually, at the end of each year of the next five years into a savings account paying 7% annual interest. How much can you raise at the end of the five years?

(b) You borrow GHS50,000 at 8% for five years to purchase a new car. Show your payment schedule to the bank.

(c) From a time value of money perspective, explain why maximization of shareholder wealth and the maximization of profit may not offer the same result.

(d) You deposit GHS10,000 today into an account paying 6% annual interest and leave it on deposit for exactly eight years.
Required:
How much will be the amount in the account at the end of eight years if interest is compounded annually?

(e) Imagine you are a professional personal finance planner. One of your clients ask you the following question. Use time value of money technique to develop appropriate responses in each question. I borrowed GHS75,000, am required to repay it in six equal (annual) end of year instalments of GHS3,344 and want to know what interest rate I am paying.

(f) Suppose that there is a GHS100,000 preference share with a 15% annual dividend rate and that the required rate of return on similar instruments is 25%. Assuming the share holder receives this dividend on the shares forever.
Required: What is the present value of this investment?

(g) You have just won a raffle conducted by a famous brewery in Ghana with a prize which pays GHS100,000 a year for 10 years. If the interest rate is 15% per annum, what is the value of this lottery?

Answer 1

g) Present Value of the lottery = 100000 * PVAF ( 15 %, 10)

                                                       = 100000 * 5.0187

                                                         = $ 501870

f) Present Value of investment = Dividend Amount / rate

                                                      = 15000 / 0.25

                                                        = $ 60000

d) Amount in the account at the end of eight years = 10000 * 1.06* 1.06* 1.06* 1.06* 1.06* 1.06* 1.06* 1.06

                                             = 15938.106