In: Accounting
(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).
________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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:
______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________
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