Question

Question 3

Calculate all the questions given using appropriate formulas.

You bought a car for RM 30,000 and will borrow RM 30,000 from the bank for 4 years. The interest charge is 7% per annum. Using simple interest calculation:
How much interest do you have to pay to the bank?      

What is the total payment for your car?              
(1 mark)

(b) You bought a house for RM 300,000 and will borrow RM 300,000 from the bank for 4 years. The interest charge is 7% per annum. Using compounding interest calculates:
How much interest do you have to pay to the bank?      
What is the total payment for your car?              

(c)    You invested RM 600 into a local bank’s investment product at 7% rate.
What would your investment be worth in 6 years?      
What would your investment be worth in 5 years?      
What do you learn from the two different answers (i) and (ii)?

(d) What will be the present value of RM 600 to be received 9 years today?
If the discount rate is 5%   ?                  
If the discount rate is 4%?                      
What do you learn from the two different answers (i) and (ii)?

You deposited RM 600 in the bank every year at 9%. What would your savings be worth at the end of
4 years?                              
5 years                              
What do you learn from the two different answers (i) and (ii)?

              
[Total: 25 marks]

Answer 1

Answer:

(a)

Purchase price of car = RM 30,000

Loan (P) = RM 30,000

No of years (n) = 4 years

Interest rate (r) = 7%

Total interest = (Loan principal (P) * No of years (n) * Interest rate (r)) / 100

= (30,000 *4 * 7) / 100 = RM 8,400

Total interest to be paid using simple interest will be RM 8,400

Total payment of the car = RM 30,000 + RM 8,400 = RM 38.400

(b)

Purchase price of house = RM 300,000

Loan (P) = RM 300,000

No of years (n) = 4 years

Interest rate (r) = 7% compounded annually

Total payment (A) = Loan principal (P) (1+Interest rate (r)) ^No of years (n)

= 300,000 (1 + 0.07) ^4 = 300,000 * (1.07)^4

= 300,000 *1.3108 = RM 393,240

Total interest to be paid using simple interest will be = RM 393,240 - RM 300,000 = RM 93,240

Total payment of the house = RM 393,240

(c)

Investment = RM 600

Rate of interest = 7%

No of periods invested = 6 years and 5 years

Case 1

Accumulated amount of investment after 6 years = Investment * (1 + Rate of interest) ^No of periods invested

= 600 * (1 + 0.07) ^ 6 = 600 * (1.07)^6 = 600*1.50 = RM 900

Case 2

Accumulated amount of investment after 5 years = Investment * (1 + Rate of interest) ^No of periods invested

= 600 * (1 + 0.07) ^ 5 = 600 * (1.07)^5 = 600*1.40 = RM 840

As the no.of accumulated years increased in first case so, the return is increased accordingly

(d)

Future value = RM 600

No. of years = 9 years

Case 1

Discount rate = 5%

Present value = Future value *(present value interest factor of RM 1 @5% for 9 years)

Using the Present Value of Interest Factor table  we can get the present value interest factor of RM 1 @5% for 9 years which is 0.645

So, Present value = RM 600 * 0.645 = RM 387

Case 2

Discount rate = 4%

Present value = Future value *(present value interest factor of RM 1 @4% for 9 years)

Using the Present Value of Interest Factor table  we can get the present value interest factor of RM 1 @4% for 9 years which is 0.703

So, Present value = RM 600 * 0.703 = RM 421.80

As the discount rate is decreased in case 2 so, the present value also increased because the discount factor has been decreased.