Question

• Advanced Engineering Group’s cash flow forecast indicates that for the next 24 months, the Group will be able to invest $50,000 in cash at an annual interest rate of 7.89% (monthly rate = 7.89%/12). The Group will invest the cash at the end of each month. At the end of 24 months, how much cash will Advanced Engineering Group have accumulated through this investment practice?
• What is the amount that Advanced Engineering Group accumulates if it invests $300,000 every six months for two years at the same annual interest rate (semiannual rate = 7.89%/2)?
• Advanced Engineering determines that for an extra $5,000 in administrative expense over two years, it could invest $25,000 semimonthly (twice per month) at the same annual interest rate as in part a. (semimonthly rate of 7.89%/24). Does the extra interest earned justify the additional administrative expense?

Answer 1

Using the financial calculator:

We need to find the future value of the investments.

a) Investment = 50,000 per month (Feed as PMT)
No of intervals= 24 months (Feed as N)
Interest Rate = 0.6575 per month (Feed as Interest Rate)

Investment on Day 0 = Nil (Feed as PV)

Then compute FV, we get 1,295,265

b)

Investment = 300,000 every 6 month (Feed as PMT)
No of intervals= 4 Semi annual (Feed as N)
Interest Rate = 3.95% per 6 month(Feed as Interest Rate)

Investment on Day 0 = Nil (Feed as PV)

Then compute FV, we get 1,272,990

c)

Investment = 25,000 semi month (Feed as PMT)
No of intervals= 48 semi months (Feed as N)
Interest Rate = 0.3288 per month (Feed as Interest Rate)

Investment on Day 0 = Nil (Feed as PV)

Then compute FV, we get 1,297,574

Additional Revenue earned compared to point a , 2309(1,297,574 - 1,295,265). For this additional return we had to incurr additional admin expenses of 5,000. Hencethe extra interest earned does not justify the additional administrative expense