Question

 

1. Suppose you had the following propositions of returns from two companies W and Y:

(10Marks)

Company	Returns (OMR)	Comments
W	475	Company W proposes to give OMR 475 today
Y	550	Company Y proposes to give you OMR 550 but after 2 years

You also know that the Interest Rate is by 10%.

Question: In which company do you choose to invest your money and why? (Use two formulas (ways) and also use Tables to make sure your answers are correct).

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

                                                                                   

2. You would like to purchase a Car that costs OMR 50000. You planned with your banker to collect the amount for this project.                                                                (5Marks)

You decided to deposit OMR 9450 each year and during 5 years.

Suppose also that the bank gives an annual Interest Rate of 6%.               

Questions:

1. Trace the Time Line illustrating the story
2. What would be the amount collected at the end of the seventh year?
3. Will you have enough money to buy the motorcycle? How much is the difference between the amount saved and the motorcycle price? Can you buy it?

______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Answer 1

a) Calculation of net present value(Npv )

NPV = Present value inflows - outflows

Present value of inflows = Inflows x present value factor

1)Future inflow after 2 years is 550

2) Present value factor @10% for 2 year is 0.826

3)Present value of future inflows from Y as on today is $550 x 0.826 = 454.55

4) Since amount from W is received today only there present value factor is 1

So there present value is 475 x 1

( money received today has present value factor 1)

Present value of amount received from X	454.55
Present value of amount received from Y	475

Conclusion:Present value of cash flows from Y is less than from W. We should invest in W

b) Schedule

Year	Opening balance	Investment	Interest @6%	Closing Balance
1	0	9450	9450 x6%=567	9450+567=10017
2	10017	9450	10017 +9450)x6%1168.02	20635.02
3	20635.02	9450	1805.10	31890.12
4	31890.12	9450	2480.41	43820.53
5	43820.53	9450	3196.23	56466.76
6	56466.76	-only 5 years-	3388.01	59854.77
7	59854.77	-	3591.29	63446.05

1) Purchase cost of motor cyccle is 50000

2)Amount accumulated is 63446.05

3) Savings after urchase is (63446.05-50000)= 13446.05

4) Collection at end of 7 years is omr 63446.05