Bfc2140 Tutorial Set 02 Solutions - Final

BFC2140
CORPORATE FINANCE I
TUTORIAL SET 02 - SOLUTIONS

FINANCIAL MATHEMATICS
Important note to students: It is your responsibility to familiarise yourself with

your own personal calculator (hp10bII+). Assistance will be provided with this
calculator in teaching materials. Do not leave learning how to use the calculator
until the last minute.
Ensure that you clear the memory.
Warm up
2-1. If you invested $200,000 today in an investment returning 6% p.a. with

interest compounding 6 monthly, how much would that investment have
grown to at the end of 10 years?
FV = $200,000(1.03)20 = $361,222.25
Using hp10bII+ calculator

Keys Display Description
1.00 Sets the number of
1 payments per year.
20.00 Enters the number of
20
payments.
3.00 Enters interest per year.
3
-200,000.00 Enters the present value.
-200,000 Note that money paid out
is entered as a negative.
361,222.25 Calculates the future value
if paid at end of the period.
2-2. A bank is quoting an interest rate of 8% p.a. compounding monthly. What is

the effective annual interest rate?
12
 0.08 
EAR offered by the bank  1    1  8.30 % (2 decimal places)
 12 
8.00 Enters the nominal rate
8
12.00 Enters payments per year
12
8.29995 Calculates the annual
effective interest rate
2-3 Fancy Nancy has to borrow funds at 10 percent to purchase a necklace. She
has a contract to sell the necklace for $70,000. Payment is to be received in
two years’ time. The necklace cost $60,000 today and could be sold for this
amount. Nancy likes this arrangement as she does not have to give up the
necklace for two years and by then fashions will possibly have changed. What
is the borrowing rate at which she would break even?
FV  C  (1  r ) n
$70,000  $60,000(1  r) 2
(1  r ) 2  1.166666667
r  8.01 %

2
payments.
-60,000.00 Enters the present value if
-60,000 cash flow at end of the
period.
Note that money paid out
70,000.00 Enters the future value.
70,000
8.01 Calculates the interest per
year.
1. Complete the following table.
Present Value ($) Years Interest Rate Future Value ($)

(%)
2,250 30 12 (i) 67409.82
9,310 16 9 (ii) 36,963.55
(iii) 11,877.67 5 4 14,451
(iv) 35,708.65 15 20 550,164
265 3 (v) 5.03 307
360 9 (vi) 8.67 761
(i)
FV  C  (1  r ) n  $2250  (1  0.12 ) 30  $67409.82

30
payments.
12
-2250 Note that money paid out
(ii) FV  C  (1  r ) n  $9310  (1  0.09 )16  $36963.55

16
payments.
9
-9310 Note that money paid out
C $14451
(iii) PV    $11,877 .67
(1  r ) n (1  0.04 ) 5
5
payments.
4
14,451
-$11,877.67 Calculates the present
value if cash flow at end of
the period.
C $550 ,164
(iv) PV    $35708 .65
(1  r ) n (1  0.20 )15
15
payments.
20
550,164
the period.
(v)
FV  C  (1  r ) n
FV
(1  r ) n 
C
1/ n
 FV 
(1  r )   
 C 
1/ n 1/ 3
 FV   307 
r   1     1  0.0503 or 5.03%
 C   265 
3
payments.
-265.00 Enters the present value if
-265 cash flow at end of the
period.
307.00 Enters the future value.
307
year.
(vi)
FV  C  (1  r ) n
FV
(1  r ) n 
C
1/ n
 FV 
(1  r )   
 C 
1/ n 1/ 9
 FV   761 
r   1     1  0.0867 or 8.67% (nearest integer)
 C   360 
9
payments.
period.
761
year.
2. At 6 percent interest, how long does it take to double your money? To

quadruple it?
FV  C  (1  r ) n
FV
(1  r ) n 
C
 FV 
n  log( 1  r )  log  
 C 
 FV 
n  log   log( 1  r )  log 2 log( 1  0.06 )  11 .90
 C 
By the rule of 72, 72/r  72/6  12 years.
6.00 Enters the interest per
6
year.
period.
2
11.90 Calculates the number of
payments.
FV  C  (1  r ) n
FV
(1  r ) n 
C
 FV 
n  log( 1  r )  log  
 C 
 FV 
n  log   log( 1  r )  log 4 / log( 1  0.06 )  23 .79
 C 
6
year.
period.
4
23.79 Calculates the number of
payments.
3. A) You are offered an investment that requires you to put up $3,000 today in
exchange for $10,000 15 years from now. What is the annual rate of return on
this investment?
FV  C  (1  r ) n
$10000  $3000  (1  r )15
10000
(1  r )15 
3000
1 / 15
 10000 
r    1  8.36 %
 3000 
15
payments.
period.
10000
year.
B) A bank offers you an interest rate of 8 percent, compounded quarterly.

Which one will you choose (taking the above investment opportunity or
investing at this bank)?
4
 0.08 
EAR offeredby the bank  1    1  8.24% (2 decimal places)
 4 
Therefore, you should take the investment opportunity (a) as it has a higher
rate of return.
8.00 Enters the nominal rate
8
4.00 Enters payments per year
4
8.24 Calculates the annual
effective interest rate
4. An investment has the following cash flows. If the discount rate is 8 per cent;
what is the present value of these flows at t=0? What is the net future value
of these flows at t=3?
YEAR CASH FLOW

1 $300
2 $600
3 $900
$300 $600 $900

PV     $1506 .63
1.08 1.08 2 1.08 3
FV  C  (1  r ) n  $300 (1.08) 2  600 (1.08)1  900  $1,897 .92

CFLO CLR Clears the cash flow
Note: The message flashes memory
and then disappears
8
year.
0.00 Enters cash flow at t=0
0
(CF0 flashes and then
disappears)
300
disappears)
600
disappears)
900
disappears)
1,506.63 Calculate the PV at t=0
1,897.92 Calculate the Net Future
Value at t=3
5. It is presently July 1, 2016, and you need to raise $10,000 by July 1, 2021.
You can invest money in your bank to earn an 8% return compounded
annually.
A) Calculate the amount of a deposit made on July 1, 2016, to give a balance

of $10,000 on July 1, 2021.
SOLUTION
Timeline
2016 2017 2018 2019 2020 2021

n=0 n=1 n=2 n=3 n=4 n=5
PV =?
FV5=$10,000
FV $10,000
PV    $6,805 .83
(1  r ) n (1.08) 5

5
payments.
8
10,000
the period.
B) Independent of A), if you receive $7,500 from your father on July 1 2017,
calculate the rate of return you must earn to reach the $10,000 required
by July 1, 2021.
SOLUTION
FV = C(1+r)n
$10,000 = $7,500(1+r)4
1
 $10 ,000  4
r =  1 = 7.46%
 $7,500 

4
payments.
-7,500.00 Enters the present value if
period.
10000
year.

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BFC2140

TUTORIAL SET 02 - SOLUTIONS

Important note to students: It is your responsibility to familiarise yourself with

Ensure that you clear the memory.

2-1. If you invested $200,000 today in an investment returning 6% p.a. with

Using hp10bII+ calculator

2-2. A bank is quoting an interest rate of 8% p.a. compounding monthly. What is

Using hp10bII+ calculator

1. Complete the following table.

Present Value ($) Years Interest Rate Future Value ($)

Using hp10bII+ calculator

(ii) FV  C  (1  r ) n  $9310  (1  0.09 )16  $36963.55

2. At 6 percent interest, how long does it take to double your money? To

B) A bank offers you an interest rate of 8 percent, compounded quarterly.

YEAR CASH FLOW

$300 $600 $900

FV  C  (1  r ) n  $300 (1.08) 2  600 (1.08)1  900  $1,897 .92

Using hp10bII+ calculator

A) Calculate the amount of a deposit made on July 1, 2016, to give a balance

2016 2017 2018 2019 2020 2021

Using hp10bII+ calculator

Using hp10bII+ calculator

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