Question

1. Classify the following changes in each of the accounts as either an outflow or an inflow of cash. (1 Mark – 0.2 each)

a) Is a decrease in land and buildings an inflow or an outflow of​ cash?

b) Is an increase in accounts payable an inflow or an outflow of​ cash?

c) Is a decrease in vehicles an inflow or an outflow of​ cash?

d) Is an increase in accounts receivable an inflow or an outflow of​ cash?

e) Is the payment of dividends an inflow or an outflow of​ cash? 

You have $5,100 to invest today at 11​% interest compounded annually. Find how much you will have accumulated in the account at the end of​: (0.5 Marks each)

(1) 4 years,

(2) 8 years, and​

(3) 12 years.

4. Using the values​ below, answer the questions that follow:

Amount of annuity

Interest rate

Deposit period​ (years)

​$500

9​%

10

a) Calculate the future value of the​ annuity, assuming that it is

(1) ​An ordinary annuity. (0.5 marks)

(2) ​An annuity due. (0.5 marks)

b) Compare your findings in parts a​(1) and a​(2). All else being​ identical, which type of annuity—ordinary or annuity due—is preferable as an​ investment? Explain why. (0.5 Marks)

Please do not solve the questions by hand because the handwriting is difficult to understand

Answer 1

Solution 1:

Classify the following changes in each of the accounts as either an outflow or an inflow of cash.

a) Is a decrease in land and buildings an inflow or an outflow of​ cash?

Decrease in land or buildings is because of a sale of the land or building and when a Sale happens, you get cash. Hence it is a cash Inflow.

b) Is an increase in accounts payable an inflow or an outflow of​ cash?

Increase in accounts payable is an inflow of cash, because you are not paying the cash but measuring it undering Accounts payable.

c) Is a decrease in vehicles an inflow or an outflow of​ cash?

Drecrease in vehicles implying sale of vehicles results in Inflow of the cash

d) Is an increase in accounts receivable an inflow or an outflow of​ cash?

Increase Accounts receivable implies amount supposed to be received is not yeat received and hence this amount is a cash outflow.

e) Is the payment of dividends an inflow or an outflow of​ cash?

Payment of dividends is an outflow of cash.

You have $5,100 to invest today at 11​% interest compounded annually. Find how much you will have accumulated in the account at the end of​:

This is calculated using the Future Value formula.

where PV is the Present value of the investment = $ 5100

r is the Interest rate per annum = 11 %

n is the Tenure

(1) 4 years,

(2) 8 years

3) 12 years.

Given:

Amount of annuity = ​$500

Interest rate = 9​%

Deposit period​ (years) = 10

a) Calculate the future value of the​ annuity, assuming that it is

(1) ​An ordinary annuity.

where PMT is the periodic payment = 500

r is the interest rate per period= 9 % per annum

n is the number of periods = 10 years

Hence, the Future Value of the Ordinary Annuity is $ 7,596.46

(2) ​An annuity due.

Future Value of an Annuity Due is given by:

where PMT is the periodic payment = 500

r is the interest rate per period= 9 % per annum

n is the number of periods = 10 years

Hence, the Future Value of the Annuity Due is $ 8280.15

Solution b: Compare your findings in parts a​(1) and a​(2). All else being​ identical, which type of annuity—ordinary or annuity due—is preferable as an​ investment? Explain why.

Future Value of the Ordinary Annuity is $ 7,596.46

Future Value of the Annuity Due is $ 8280.15

Future Value of the Annuity Due is greater than that of Ordinary Annuity. Hence, Annuity Due is preferable for investment.