UNIVERSITY OF CAPE COAST

COLLEGE OF HUMANITIES AND LEGAL STUDIES

SCHOOL OF BUSINESS
DEPARTMENT OF FINANCE
BUSINESS FINANCE TUTORIAL SET 2

Question 1
Distinguish between the following:
a. Simple interest and compound interest
b. Present value and future value
c. Annuity and perpetuity
d. Discounting and compounding
e. Nominal interest rate and effective interest rate
f. Annuity in advance and annuity in arrears
g. Amortization and sinking fund
h. Independent projects and mutually exclusive projects.

Question 2
a. BCOM ADM deposits money in a bank that pays a 12% nominal rate.
Determine the effective interest rate if it is compounded (i) annually (ii)
semi-annually (iii) quarterly (iv) monthly (v) weekly (vi) daily and (vii)
continuously.
b. b. You have the choice of making a 3year deposit of GHS 5500 into four
different types of saving account. One of the accounts earns 3% annual
interest that compounds annually, the second earns 3% annual interest that
compounds semiannually, the third earns 2.5% that compounds quarterly
and the fourth earns 2.2% that compounds monthly. Which account will
 yield the highest compound amount? What is the compound interest amount
for each type of account?
c. Exornam invested GH¢1600 at a rate of 9.25% compounding continuously
for five years. What is the value at the end of the period?
d. An investment promises GH¢3466.02 at the end of five years compounding
continuously at rate of 8%. How much is the investment worth now?
e. BCOM Bank Ltd charges 13.4% compounded monthly on its personal loans
while BED Bank Ltd charges 13.7% semiannually. Your mother wants to
take a loan from BCOM Bank Ltd because she thinks that is cheaper, help
her decide.

Question 3
a. Suppose you make an investment of GHS 10000. In the first year, the investment
returns 12%, the second year it returns 6% and the third year it returns 8%. How
much would this investment be worth, assuming no withdrawals are made?
b. The average stock market returns since 2017 has been 11%. According to the
rule of 72, how often will an individual investment double?
c. At the time of your birth, 35 years ago, your parents deposited GHS1200 in an
account that earns an annual compound interest rate for 15% on the following
conditions:
i. You must withdraw half the accumulated amount on your eighteenth birthday;
and
ii. On or after your thirty-fifth birthday, you can close the account.
Today is your thirty-fifth birthday how much is left in the account to withdraw?

d. You plan to purchase a car for your son, Akulugu, on his 25th birthday. The car
will cost GHS 350000 and Akulugu is 15 years old now. You are considering two
options: (i) To deposit a lump sum which will grow to the amount needed. (ii) To
deposit at the beginning of each year a fixed amount to accumulate to the needed
amount.
If the interest rate is 17%, how much will you need for each option.
Question 4
a. How many years will it take for $197000 to grow to be $554000 if it is invested
in an account with a quoted annual interest rate of 13% with monthly compounding
of interest?
b. If you wish to accumulate $140000 in 13 years, how much must you deposit
today in an account that pays an annual interest rate of 14%?
c. Regina borrowed GHS2000 from Jacob for 3years and paid GHS 3456 at the end
of the period. At what rate was the amount lent.
d. What will $247000 grow to be in 9 years if it is invested today in an account
with an annual interest rate of 8%?
e. You are offered an annuity that will pay GHS24000 per year for 11 years (the
first payment will occur one year from today). If you feel that the appropriate
discount rate is 13%, what is the annuity worth to you today? What if the first
payment is made now?
f. You have been given the following options for being adjudge the overall best
student at the recently held Dean’s Awards:
(i) To receive GHS 2000 now
(ii) To receive GHS 310 forever
(iii) To receive GHS600 annually for the next five years.
(iv) To receive GHS 900, GHS 800, GHS 700 and GHS 600 in years 1, 2, 3, and 4
respectively.
Which of the options will you choose and why, if the prevailing interest rate is
20%?

Question 6
a. Enoch and Nkrumah desire to own a house that cost GHS 100,000 so as to do
away with their troublesome landlord. To do this, they took a 5year, 9% GHS
100000 mortgage from Ghana Home Loans Limited. The mortgage payments
include both the principal and interest. Enoch wants to prepare an amortization
schedule for their loan repayment. Help in in their computations.
b. Richard Acquah is planning to build a hostel facility for students at Kwaprow.
He approached his bankers for a loan of GHS 700000. The bank agreed to grant
him the loan
c. at the rate of 20% per annum payable monthly for seven years. As the credit
officer of the bank, you are required to
(i) Determine the amount to be paid each month
(ii) How much of the first installment is for principal repayment?
(iii) Prepare an amortization schedule for the first six months of the loan
(iv) What is the total interest and principal paid at the end of the sixth month?
d. A machine which will cost $15000 will need to be purchased in 4 years’ time by
Actuarial Enterprise. A savings account that yields 6% annual compound interest
has been opened in which annual deposits will be made to realize the amount. (i)
Compute the regular deposit. (ii) Construct a sinking fund schedule for the
realization of the full amount.
e. BED Ghana Ltd borrowed $60000 from Amamoma Rural Bank on agreement
that the loan will be paid back to the bank in one payment at the end of five years.
The bank granted the loan at an annual rate of 20%. The Chief Finance Officer
wants to set up a fund that will be enough to repay the loan at the end of the
5years. The company agreed to make annual payments into the fund that earns
15% interest compounded annually.
(i) What is the name of the fund being established?
(ii) What will be the annual contributions into the fund?
(iii) Calculate the annual payments into the fund if the company made an initial
deposit of 9% into the fund.
(iv) Construct a schedule to show how the fund grows over the time in both
instances.