`e^mqbo=P=

s^ir^qflk=`lk`bmqp==m^oq=f= qfjb=s^irb=lc=jlkbv = i~==

After studying this chapter, you should be able to understand the following: Financial Decision Making Present Value Of Annuities Future Value Of Annuities Simple And Compound Interest Discounting Applicable Interest Rate Perpetuities Inflation and the time value of money

= = PKM== fkqolar`qflk=

We regard Chapter 3 as the most important chapter in this Manual, so we spend a good bit of time on it. We approach time value in three ways. First, we try to get students to understand the basic concepts by use of time lines and simple logic. Second, we explain how the basic formulas follow the logic set forth in the time lines. Third, we show how time value tables can be used to solve various time value problems in an efficient manner. Once we have been through the basics, we have students work problems and become proficient with the calculations and also get an idea about the sensitivity of output, such as present or future value, to changes in input variables, such as the interest rate or number of payments. Some instructors prefer to take a strictly analytical approach and have students focus on the formulas themselves. Others prefer to use the Present Value Tables, which have for many years been supplied with the text. In both cases, the argument is made that students treat their calculators as black boxes, and that they do not understand where their answers are coming from or what they mean. We disagree. We think that our approach shows students the logic behind the calculations as well as alternative approaches, and because calculators are so efficient, students can actually see the significance of what they are doing better if they use a calculator. We also think it is important to teach students how to use the type of technology they must use when they venture into the real world. In the past, the biggest stumbling block to many of our students has been time value, and the biggest problem there has been that they did not know how to use their calculator when we got into time value. Therefore, we strongly encourage students to get a calculator early, learn to use it, and bring it to class so they can work problems. The relationship between time and money provides the foundation for virtually every financial decision financial managers have to make. Whether they are saving money for a future event or considering a loan to pay for a current financial need, financial managers will be greatly impacted by the time value of money. This is true for two main reasons. First, a Kwacha received today can earn interest or appreciate in an investment account, thus increasing its value with

- 53 = `~=P= q=~===

time. Second, inflation impacts the value of that Kwacha. As the price of goods increases with time due to inflation, the value (or purchasing power) of the Kwacha decreases implying that a Kwacha is not able to buy the same amount of goods it would have bought if there was no inflation in the world. And as you may imagine, such a world, without inflation, can only exist in our dreams. Thus, the scope of business decisions covers a considerable period of time in which inflation will almost certainly take its toll. The values of cash flows related to those decisions occurring over this wide time period are accordingly and imperatively affected by the time value of money. As most decisions focus on doing something today, such as making an investment, with returns flowing over future time periods, it is important for students to understand that cash flows in such different time periods may not be comparable and must, therefore, be adjusted to a common time period, usually to the present, before comparison and analyses can be performed. This adjustment reflects the opportunity cost of alternative investment and the adjustment focus in most decisions is the current period. The concepts in this and the next two chapters are based on one of the most important ideas in financial management, which is, the dividend valuation model. This says that the price which shareholders are willing to pay for a security equals the future cash receipts expected to be generated by the security, discounted at the shareholders' required rate of return. The concepts learnt in these three chapters will prove handy as you tackle advanced topics such as investment appraisal, company valuation and risk management in later chapters. Time Value of Money (TVM) is an important concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgages, leases, savings, and annuities. TVM is based on the concept that a Kwacha that you have today is worth more than the promise or expectation that you will receive a Kwacha in the future. Money that you hold today is worth more because you can invest it and earn interest. After all, you should receive some compensation for foregoing spending. For instance, you can invest your Kwacha for one year at a 6% annual interest rate and accumulate K1.06 at the end of the year. You can say that the future value of the Kwacha is K1.06 given a 6% interest rate and a one-year period. It follows that the present value of the K1.06 you expect to receive in one year is only K1.00. Some skillful observer of the laws of physics as well as economics once said that the two most powerful forces in the world are gravity and the time value of money. It would be hard to argue that point. And since the time value of money is the foundation of all financial planning, we need to establish a thorough understanding of this powerful concept if we are to achieve financial security throughout life. There are several elements that can enter into the Time Value of Money - that magical concept that allows you to quantify your goals in Kwacha amounts - including five "variables" that interact in any given situation, namely: Present Value (PV); Future Value (FV); Number of compounding periods (N) or sometimes (T); Interest Rate (I) or sometimes (R); and Periodic Payment Amount (PMT). Working with these variables and a good financial calculator, or just plain old annuity tables, found at the back of this Manual, one can use the known factors to determine the unknown quantities through the use of standard formulas. A key concept of TVM is that a single sum of money or a series of equal, evenly-spaced payments or receipts promised in the future can be converted to an equivalent value today. Conversely, you can determine the value to which a single sum or a series of future payments will grow to at some future date. You can calculate the fifth value if you are given any four of: Interest Rate, Number of Periods, Payments, Present Value, and Future Value.

- 54 = `~=P= q=~===

Suppose someone promises to pay you K100, 000 in some future period (T). This amount of money actually has two different values: a nominal value of K100, 000, which is simply a measure of the number of Kwacha that you will receive in period (T); and a present value (sometimes referred to as a present discounted value), roughly defined to be the minimum number of Kwacha that you would have to give up today in return for receiving K100, 000 in period (T). Stated somewhat differently, the present value of the future K100,000 payment is the value of this future K100,000 payment measured in terms of current (or present) Kwacha. The concept of present value permits financial assets with different associated payment streams to be compared with each other by calculating the value of these payment streams in terms of a single common unit: namely, current Kwacha. A specific procedure for the calculation of present value for future payments will now be developed.

PKN ==

cfk^k`f^i=ab`fpflk=j^hfkd=

Think for a moment, can you look me in the eye and deny that Life is about making decisions? Indeed you cant. Life is about making decisions, whether they relate to your work, business or personal life. Often ignored is the interplay between all these areas, and the fact that a little interdisciplinary thinking can go a long way. This might sound obtuse, but many important decisions can be made easier by thinking simply, and a bit differently. Before we go any further, lets take a note about value and utility. Business is about creating value. Our personal lives, according to economists, are about maximizing our utility, where utility is simply a measure of the happiness or satisfaction gained from a good or service. Think of it this way, and business is considered first. If shareholders, either owners or investors, could create more value themselves using other means, why bother running or investing in a business? Assuming we don't all have a perpetual income stream it comes back to this - if you don't create value in today's economy, you'll be forced to do one of two things. Change how you do things, or cease to exist. For business the value question is rather important. People have it a little easier in some respects. Creating maximum utility is an incentive in and of itself. In the end, we all want more, whether it is revenue and growth for business, or old-fashioned utility in our personal lives. To get more, we return to the decisions mentioned earlier, as all the decisions we make have a direct impact on both value creation and utility maximization, in particular those related to finance. Successful strategic management, which is the direction you want to take the business, is supported by your investment policy, choosing which projects to undertake, and your financing policy, how you fund everything. Linked to all of this is risk management, or how you handle the risks associated with these financial decisions. Personally, financial decisions influence your quality of life, and your ability to enjoy the things you want. Once again we are back looking at the study of incentives - how people get what they want, or need, especially when other people want or need the same thing. In this case, it's maximum utility. One of the cornerstones of modern finance assists us in understanding which decisions to make, and it is equally applicable to business and personal finance. Its known as the Time Value of Money. We have already alluded to this in the preceding section. Simply put, K1 today is worth more to you than K1 received in the future. Why? Money has a time value because of interest rates, no matter how measly, making K1 today more valuable than K1 received at some time in the future because it can be invested today to provide a return. The income from the investment will in turn, make the K1 you get today worth more than the one promised to you in the future.

- 55 = `~=P= q=~===

Again, this comes back to the incentives mentioned earlier. Interest rates are paid because someone else can use your money now, and they are prepared to pay you a return for the privilege of doing so, which is in truth a premium for taking the risk of giving your money to someone else. With business, this concept is part of what is known as the Sharpe-Lintner Capital Asset Pricing Model (CAPM for short), allowing people to work out, in today's terms, the value of future cash flows on any project or decision requiring investment. This topic is discussed in detail in Chapter 6 where we discuss the Capital Asset Pricing Model. There is another side to this discussion, and it's slightly more personal. The time value of money can apply to you, and specifically, your utility. To understand how, we need to look at things the other way round and get a handle on the incentives of everyone involved. Think of large personal assets you might have, like a House bought through a structured settlement plan. The agreements reached in setting up the settlement left you with a sense of security for the future and continuing, dependable payments over time. Comfortable, hmm? Let's look at the incentives. Lets look at what really motivated your bank or the National Housing Authority to extend the facility to you. To be able to really understand what is going on, you have to think like they do. The illusion is that you will be better off down the track with the settlement. The problem is, they don't want you to have all your money now because they understand the time value of money. Its worth more to them, and they bank on the fact that you haven't given it a second thought. How much value is there for you in holding first-mortgage on a property for 20 years, compared with maximizing your utility? How much utility is your monthly settlement cheque going to provide you in 10 years? Just think about increases in the cost of living over the next fifteen years, and how the monthly cheque stands up. Remember the time value of money can be used both for and against you. And find out which way it is being used, just look to which party has the larger incentives. The Time Value of Money has applications in many areas of Corporate Finance including Capital Budgeting, Bond Valuation, and Stock Valuation. For example, a bond typically pays interest periodically until maturity at which time the face value of the bond is also repaid. The value of the bond today, thus, depends upon what these future cash flows are worth in today's Kwacha.

PKO ==

mobpbkq=s^irbp=

You must remember the old saying - "A bird in the hand is worth two in the bush". Well, at the risk of sounding a broken record, we must repeat that a Kwacha received today is worth more than a Kwacha received tomorrow or a year from now. Why? Because that Kwacha can be invested in order to earn interest. If a payment received today is not worth the same as one received next year because of the lost investment opportunity, then what is it worth? What is its present value? Let's look at an example. If you were to receive a payment of K110 next year and your investment opportunity is l0%, the present value of that payment is K100. If someone interested in purchasing your investment offered you K105 for it today, it would be a good deal because it would increase your present value by K5. The concept of present value is very useful in comparing investment alternatives that have different cash flows, interest rates and spread over different periods of time. Lease pricing also uses the present value of annuities, where an annuity factor represents the value of K1 received or paid in each period over a specified number of periods. This factor is used to determine the present value of a stream of payments, like lease rentals.

- 56 = `~=P= q=~===

PKOKN== mobpbkq=s^irb=lc=m^vjbkqp==pfkdib=mboflap=
We have already alluded to the fact that Present Value is an amount today that is equivalent to a future payment, or series of payments, that has been discounted by an appropriate interest rate. Since money has time value, the present value of a promised future amount is worth less the longer you have to wait to receive it. The difference between the two depends on the number of compounding periods involved and the interest or discount rate. The relationship between the present value and future value can be expressed as: PV = FV [ 1 / (1 + i)n ] Where: PV = Present Value FV = Future Value i = Interest Rate per Period n = Number of Compounding Periods

bu^jmibJ=N= j^kab=t^jrkafi^=
Mande wants to buy a house 5 years from now for K150, 000, 000. Assuming a 6% interest rate compounded annually, how much should she invest today to yield K150, 000,000 in 5 years?

ANSWER: FV =K 150,000,000 i =.06 n=5 PV = 150,000,000 [1 / (1 + .06)5] = 150,000,000 (1 / 1.3382255776) = K112, 088,730 Tabular presentation (K000) End of Year Principal Interest Total 1 2 3 4 5

112,088.73 118,814.05 125,942.89 133,499.46 141,509.43 6,725.32 7,128.84 7556.57 8,009.97 8,490.57

118,814.05 125,942.89 133,499.46 141,509.43 150,000.00

- 57 = `~=P= q=~===

= bu^jmib=J=O=
If Mande Wamundila finds another financial institution that offers an interest rate of 6% compounded semi annually. How much less can she deposit today to yield K150, 000, 000 in five years?

^kptboW=
Interest is compounded twice per year so you must divide the annual interest rate by two to obtain a rate per period of 3%. Since there are two compounding periods per year, you must multiply the number of years by two to obtain the total number of periods. FV = K150, 000,000 i = .06 / 2 = .03 n = 5 * 2 = 10 PV = 150,000, 000 [1 / (1 + .03)10] = 150,000,000 (1 / 1.343916379) = K 111,614,090

PKOKO== mobpbkq=s^irb=lc=^=pqob^j=lc=^o_fqo^ov=m^vjbkqp=
Now suppose one will be receiving a sequence of three payments over the next three years. The nominal value of the first payment is K100, to be received at the end of the first year; the nominal value of the second payment is K150, to be received at the end of the second year; and the nominal value of the third payment is K200, to be received at the end of the third year. Given a fixed annual interest rate i, what is the present value of the payment stream (K100, K150, K200) consisting of the three separate payments K100, K150, and K200 to be received over the next three years? To calculate the present value of the payment stream (K100, K150, and K200), use the following two steps: Step 1: Calculate the present value of each of the individual payments in the payment stream, taking care to note how many years into the future each payment is going to be received. Step 2: Sum the separate present value calculations obtained in Step 1 to obtain the present value of the payment stream as a whole. Carrying out Step 1, it follows that the present value of the K100 payment to be received at the end of the first year is K100/ (1+i). Similarly, it follows that the present value of the K150 payment to be received at the end of the second year is: K150 ---------(1+i) 2 Finally, it follows that the present value of the K200 payment to be received at the end of the third year is K200 ----------

- 58 = `~=P= q=~===

(1+i) 3 Consequently, adding together these three separate present value calculations in accordance with Step 2, the present value PV (i) of the payment stream (K100, K150, K200) is given by: PV(i) = K100 + K150 + K200 (1 + i)1 (1 + i)2 (1 + i)3

More generally, given any fixed annual interest rate i, and given any payment stream (V1,V2,V3,...,VN) consisting of individual payments to be received over the next N years, the present value of this payment stream can be found by following the two steps outlined above. In particular, then, given any fixed annual interest rate, and given any payment stream paid out on a yearly basis to the owner of some financial asset, the present (current Kwacha) value of this payment stream can be found by following Steps 1 and 2 outlined above. Consequently, regardless how different the payment streams associated with different financial assets might be, one can calculate the present values for these payment streams in current Kwacha terms and hence have a way to compare them. Many finance situations involve more than one cash flow. Whether they are equal, consecutive payments or irregular, unequal cash flows over time, they are referred to as a stream of cash flows. Accumulating a future sum via unequal, periodic payments entails a combination of a series of single future value cash flows. Calculating the present value of a unequal series of future cash flows is determined by summing the present values of each discounted single future cash flow. The future value of a sum of equal, annual (or every period) cash flows is the future value of an annuity. Annuity refers to equal, consecutive payments. Cash flows in a period are assumed to occur at the end of the period. An ordinary annuity assumes cash flows occur at the end of each period; an annuity due assumes they are paid at the beginning of the period.

PKOKP== mobpbkq=s^irb=lc=^k=loafk^ov=^kkrfqv=
The Present Value of an Ordinary Annuity (PV-oa) is the value of a stream of expected or promised future payments that have been discounted to a single equivalent value today. It is extremely useful for comparing two separate cash flows that differ in some way. PV-oa can also be thought of as the amount you must invest today at a specific interest rate so that when you withdraw an equal amount each period, the original principal and all accumulated interest will be completely exhausted at the end of the annuity. The Present Value of an Ordinary Annuity could be solved by calculating the present value of each payment in the series using the present value formula and then summing the results. A more direct formula is: PVoa = PMT [(1 - (1 / (1 + i)n)) / i] Where: PVoa = Present Value of an Ordinary Annuity PMT = Amount of each payment i = Discount Rate Per Period n = Number of Periods

- 59 = `~=P= q=~===

= bu^jmib==P= cilobk`b=akdfib=kaeilsr=
What amount must Florence invest today at 6% compounded annually so that she can withdraw K5, 000 at the end of each year for the next 5 years?

^kptboW=
PMT = 5,000 i = .06 n=5 PVoa = 5,000 [(1 - (1/(1 + .06)5)) / .06] = 5,000 (4.212364) = 21,061.82 Year Begin Interest Withdraw End 1 2 3 4 5

21,061.82 17,325.53 13,365.06 9,166.96 4,716.98 1,263.71 -5,000 1,039.53 -5,000 801.90 -5,000 550.02 -5,000 283.02 -5,000 .00

17,325.53 13,365.06

9,166.96 4,716.98

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Inonge Loti, a computer dealer offers to lease a system to you for K50 per month for two years. At the end of two years, you have the option to buy the system for K500. You will pay at the end of each month. She will sell the same system to you for K1, 200 cash. If the going interest rate is 12%, which is the better offer?

^kptboW=
You can treat this as the sum of two separate calculations: 1. The present value of an ordinary annuity of 24 payments at K25 per monthly period Plus 2. The present value of K500 paid as a single amount in two years. PMT = 50 per period i = .12 /12 = .01 Interest per period (12% annual rate / 12 payments per year) n = 24 number of periods

- 60 = `~=P= q=~===

PVoa = 50 [ (1 - ( 1/(1.01)24)) / .01] = 50 [(1- ( 1 / 1.26973)) /.01] = 1,062.17 PLUS FV = 500 Future value (the lease buy out) i = .01 Interest per period n = 24 Number of periods PV = FV [1 / (1 + i) n] = 500 (1 / 1.26973) = 393.78 The present value (cost) of the lease is K1, 455.95 (1,062.17 + 393.78). So if taxes are not considered, you would be K255.95 better off paying cash right now if you have it.

PKOKQ== mobpbkq=s^irb=lc=^k=^kkrfqv=arb=
The Present Value of an Annuity Due is identical to an ordinary annuity except that each payment occurs at the beginning of a period rather than at the end. Since each payment occurs one period earlier, we can calculate the present value of an ordinary annuity and then multiply the result by (1 + i). PVad = PVoa (1+i) Where: PV-ad = Present Value of an Annuity Due PV-oa = Present Value of an Ordinary Annuity i = Discount Rate Per Period

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What amount should Mawila Chifwanakeni invest today at 6% interest rate compounded annually so that she would be able to withdraw K5, 000 at the beginning of each year for the next 5 years?

^kptboW=
PMT = 5,000 i = .06 n=5

- 61 = `~=P= q=~===

PVoa = 21,061.82 (1.06) = 22,325.53 Year 1 2 3 4 9,716.98 283.02 5 5,000.00

Begin 22,325.53 18,365.06 14,166.96 Interest Withdraw 1,039.53 -5,000.00 801.90 -5,000.00 550.02

-5,000.00 -5,000.00 -5,000.00 9,716.98 5,000.00 .00

End 18,365.06 14,166.96

PKP crqrob=s^irbp=lc=^kkrfqfbp=
Future Value describes the process of finding what an investment today will grow to in the future. It is the amount of money that an investment made today (the present value) will grow to by some future date. Since money has time value, we naturally expect the future value to be greater than the present value. The difference between the two depends on the number of compounding periods involved and the going interest rates.

PKPKN== crqrob=s^irb=lc=^k=loafk^ov=^kkrfqv=
The Future Value of an Ordinary Annuity (FVoa) is the value that a stream of expected or promised future payments will grow to after a given number of periods at a specific compounded interest. The Future Value of an Ordinary Annuity could be solved by calculating the future value of each individual payment in the series using the future value formula and then summing the results. A more direct formula is: FVoa = PMT [((1 + i)n - 1) / i] Where: FVoa = Future Value of an Ordinary Annuity PMT = Amount of each payment i = Interest Rate Per Period n = Number of Periods

bu^jmib==S= alo`^p=jrqfqf=
What amount will accumulate if Dorcas were to deposit K5, 000 at the end of each year for the next 5 years? Assume an interest of 6% compounded annually.

^kptboW=

- 62 = `~=P= q=~===

PV = 5,000 i = .06 n=5 FVoa = 5,000 [ (1.3382255776 - 1) /.06 ] = 5,000 (5.637092) = 28,185.46 Year Begin Interest 1 0 0 2 3 4 5

5,000.00 10,300.00 15,918.00 21,873.08 300.00 5,000.00 618.00 5,000.00 955.08 5,000.00 1,312.38 5,000.00

Deposit 5,000.00

End 5,000.00 10,300.00 15,918.00 21,873.08 28,185.46 In practical problems, a person may wish to calculate both the future value of an annuity - a stream of future periodic payments and the future value of a single amount that they have today.

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Janja Mustafer is 40 years old and has accumulated K50, 000 in his savings account. He can add K100 at the end of each month to his account which pays an interest rate of 6% per year. Will he have enough money to retire in 20 years?

ANSWER: You can treat this as the sum of two separate calculations: The future value of 240 monthly payments of K100 Plus the future value of the K50, 000 now in his account. PMT = K100 per period i = .06 /12 = .005 Interest per period (6% annual rate / 12 payments per year) n = 240 periods FVoa = 100 [ (3.3102 - 1) /.005 ] = 46,204 + PV = 50,000 Present value (the amount you have today) i = .005 Interest per period n = 240 Number of periods FV = PV (1+i)240 = 50,000 (1.005)240 = 165,510.22 After 20 years Janja will have accumulated K211, 714.22 (46,204.00 + 165,510.22).

- 63 = `~=P= q=~===

PKPKO== crqrob=s^irb=lc=^k=^kkrfqv=arb=
The Future Value of an Annuity Due is identical to an ordinary annuity except that each payment occurs at the beginning of a period rather than at the end. Since each payment occurs one period earlier, we can calculate the present value of an ordinary annuity and then multiply the result by (1 + i). FVad = FVoa (1+i) Where: FVad = Future Value of an Annuity Due FVoa = Future Value of an Ordinary Annuity i = Interest Rate Per Period

= bu^jmib==U= j^m^il=jribkd^=
What amount will accumulate if Mapalo were to deposit K5, 000 at the beginning of each year for the next 5 years? Assume an interest of 6% compounded annually.

^kptboW=
PV = 5,000 i = .06 n=5 FVoa = 28,185.46 (1.06) = 29,876.59 Year Begin 1 0 2 3 4 5

5,300.00 10,918.00 16,873.08 23,185.46 5,000.00 618.00 5,000.00 955.08 5,000.00 1,312.38 5,000.00 1,691.13

Deposit 5,000.00 Interest 300.00

End 5,300.00 10,918.00 16,873.08 23,185.46 29,876.59

- 64 = `~=P= q=~===

PKQ pfjmib=^ka=`ljmlrka=fkqbobpq==
When an amount of money is invested over a number of years, the interest earned can be dealt with in two ways.

PKQKN== p=f=
This is where any interest earned is NOT added back to the principal amount invested. For example, suppose that K200, 000 is invested at 20% simple interest per annum. The following table shows the state of the investment, year by year:

Year 1 2 3

Principal 200,000 200,000 200,000

Interest earned 40,000 (20% of 200,000) 40,000 (20% of 200,000) 40,000 (20% of 200,000)

Cumulative 240,000 280,000 320,000

Simple interest is calculated on the original principal only. Accumulated interest from prior periods is not used in calculations for the following periods. Simple interest is normally used for a single period of less than a year, such as 30 or 60 days. Simple Interest = p * i * n Where: p = principal (original amount borrowed or loaned) i = interest rate for one period n = number of periods

= bu^jmib==V= g^_ri^kf=jribkd^==
Suppose that Mr. Jabulani Mulenga decides to borrow K10, 000 for 3 years at 5% simple annual interest.

==

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Interest = p * i * n = 10,000 * .05 * 3 = 1,500

- 65 = `~=P= q=~===

PKQKO== `=f=
The notion of compound interest is central to understanding the mathematics of finance. The term itself merely implies that interest paid on loan or an investment is added to the principle. As a result, interest is earned on interest. Compounding is the arithmetic process of determining the final value of a cash flow or series of cash flow or series of cash flows when compound interest is applied. Year 1 2 3 Principal 200,000 240,000 288,000 Interest earned 40,000 (20% of 200,000) 48,000 (20% of 240,000) 57,600(20% of 288,000) Cumulative 240,000 280,000 345,600

The difference between the two methods can easily be seen by comparing the above two tables. Notice that the amount on which simple interest is calculated is always the same. Compound interest is calculated each period on the original principal and all interest accumulated during past periods. Although the interest may be stated as a yearly rate, the compounding periods can be yearly, semiannually, quarterly, or even continuously. You can think of compound interest as a series of back-to-back simple interest contracts. The interest earned in each period is added to the principal of the previous period to become the principal for the next period. For example, you borrow K10, 000 for three years at 5% annual interest compounded annually: Interest year 1 = p * i * n = 10,000 * .05 * 1 = 500 Interest year 2 = (p2 = p1 + i1) * i * n = (10,000 + 500) * .05 * 1 = 525 Interest year 3 = (p3 = p2 + i2) * i * n = (10,500 + 525) *.05 * 1 = 551.25 Total interest earned over the three years = 500 + 525 + 551.25 = 1,576.25. Compare this to 1,500 earned over the same number of years using simple interest. The power of compounding can have an astonishing effect on the accumulation of wealth. This table shows the results of making a one-time investment of K10, 000 for 30 years using 12% simple interest, and 12% interest compounded yearly and quarterly. Type of Interest Simple Compounded Yearly Principal Plus Interest Earned 46,000.00 299,599.22

Compounded Quarterly 347,109.87 You can solve a variety of compounding problems including leases, loans, mortgages, and annuities by using the present value, future value, present value of an annuity, and future value of annuity formulae.

PKR==

afp`lrkqfkd=

Discounting is nothing more than the flip side of compounding! The time value of money is a two-way street. You start with the premise that a Kwacha you get today is worth more than a Kwacha you'll get at some point down the road, because you can invest today's Kwacha and earn interest on it starting today. (And add to that the thought that inflation hasn't had a chance to erode today's Kwacha yet.) But as you might rightly guess inflation is just as real and

- 66 = `~=P= q=~===

certain as death. This makes investors, or any person for that matter to be more inclined to having money now rather than later. This is called Cash or liquidity preference. Cash preference is preferring income today to getting the same income in the future. Economists assume that pretty much everybody has cash preference, and here is why: Life is short. Suppose you are broke (for many students, that's not too hard to imagine) and you need a car today to be able to drive to the job you want. Working and saving to buy a car someday may not be your best option. If the job you want pays better, you'll be better off borrowing money to buy a car now, even though you'll have to pay interest to the lender. Because there are always people in this circumstance, for whom borrowing is a good idea, there is a market for loanable funds, and that's why there are bank accounts that pay interest. The existence of these bank accounts in turn means that even if you don't have a pressing need for money now, you're still better off getting it now than getting it later. One exception to the cash preference rule is that some people like to have their future money held for them so they don't spend it foolishly now. For instance someone who get paid only from August to May might ask the payroll office to take a slice out of each pay cheque and hold it, then pay it out during the following summer. This someone doesnt trust himself to save for the summer on his own. Because investors prefer immediate cash returns over future cash returns, investors pay less for future cash flows--they "discount" them. The amount investors discount the future cash flows depends on the length of time until the cash is due, the amount of risk that the cash will not be tendered when due and the rate of return available from other comparably risky investments. This discounting procedure converts future income to present value usually using annual discount factors. The discount factor for each successive year declines to reflect the reduced value of revenue received in the future. The appraiser calculates the present worth of the forecast revenue stream by multiplying the projected net income (cash flow) for each year by the calculated discount factor for that year. These discount factors are derived from the discount rate (also known as the yield rate), and the process is known as discounted cash flow (DCF) analysis. The Discount rate is the rate of return on investment; the rate an investor requires to discount future income to its present worth. It is made up of an interest rate and an equity yield rate. Theoretical factors considered in setting a discount rate are the safe rate earned from a completely riskless investment (this rate may reflect anticipated loss of purchasing power due to inflation) and compensation for risk, lack of liquidity, and investment management expenses. The discount rate is most often estimated by band-of-investment analysis or a sales comparison analysis that estimates typical internal rates of return. The discount rate is a key variable in discounted cash flow analysis, making correct rate selection crucial. The market's expectations are critical when estimating a discount rate. The selection of a yield [discount] rate is critical to DCF analysis. To select an appropriate rate an appraiser must verify and interpret the attitudes and expectations of market participants, including buyers, sellers, advisers, and brokers. Although the actual yield on an investment cannot be calculated until the investment is sold, an investor may set a target yield for the investment before or during ownership. Historical yield rates derived from comparable sales may be relevant, but they reflect past, not future, benefits in the mind of the investor and may not be reliable indicators of current yield. Therefore, the selection of yield rates for discounting cash flows should focus on the prospective or forecast yield rates anticipated by typical buyers and sellers of comparable investments. An appraiser can verify investor assumptions directly by interviewing the parties to comparable sales transactions or indirectly by estimating the income expectancy and likely reversion for a comparable property and deriving a prospective yield rate.

- 67 = `~=P= q=~===

PKRKN== a=`~=c=^~~==
The DCF method is versatile and widely used to appraise income producing property. An appraiser using DCF first projects an anticipated net income for each year of the property's remaining economic life. Each annual cash flow is discounted to present value, and then all the present values are added to obtain the total market value of the real property interest being appraised. The DCF equation is expressed as follows: PV = CF1 x (PWF1) + CF2 x (PWF2) + ... CFn x (PWFn) Where: PV = present value CF = the cash flow or income for the period specified PWF = the end of period present worth factor, equals 1/((1+i)n) i = discount rate (the period compound interest rate) n = the period for the present worth factor being calculated. To estimate the present value (PV), an estimate of the income (cash flow) to be received in each period is necessary. The number of periods, n, (usually years) used in the analysis is determined by the number of years that the mineral property is expected to produce a positive net income. There are many variations on the DCF formula. The formulas vary based on the time the money is received, i.e. continuously, beginning of period, middle of period or end of period. The period may be continuous, daily, monthly, quarterly, bi-annual or annual. Many oil properties are evaluated using an annual mid-period discounting variation of the DCF formula. The appropriate present worth factor for mid-year DCF analysis is: PWFMY = 1/ ((1+i)(n-.5)) Where: PWFMY = mid-year present worth factor.

PKRKO== a=o~=`==
The discount rate used in discounted cash flow analysis has several components. These include:

q=~=~==
The annual rate of price change for a basket of consumer goods. Inflation is normally measured by the Consumer Price Index for All Urban Consumers (CPI-U), calculated by the Central Statistics Office and the Catholic Centre for Theological Reflection. The inflation rate is the most basic component of a discount rate. An investor's rate of return must equal the rate of inflation just to break even in real Kwacha terms.

q=J==
A return to compensate the investor for a loss of liquidity. This component can also be defined as the risk-free rate minus the inflation rate. The risk-free rate is made up of the inflation rate plus a return to reimburse the investor for a loss of liquidity and is measured by the yield to maturity on Government securities with a maturity period comparable to the investment under consideration. The market perceives these securities as risk-free for all practical purposes since they are issued by the Zambian Government.

- 68 = `~=P= q=~===

= = d~====
A return to compensate the investor for assuming diversified company-wide risk. The weighted average cost of capital (WACC) minus the risk-free rate is the general risk premium. The WACC is measured by weighting the typical company debt and equity costs by the typical company debt and equity capital structure percentages, and then adding the weighted costs. If one were appraising companies, the WACC would be the discount rate since it reflects the market's expected yields from the stock and debt of a company. Calculation of a WACC will be explained in more detail later in this study manual.

p====
A return that compensates the investor for assuming the unique risks associated with a particular investment. The discount rate minus the WACC is the Investment-specific risk premium. Investors demand a premium above the WACC to compensate them for this individual investment risk. For certain high-risk investments, this premium can be quite high.

`=~==
These discount rate components can be summarized: == fkci^qflk=o^qb= H=ofph=cobb=`ljmlkbkq= H=dbkbo^i=ofph=mobjfrj= H=pmb`fcf`=ofph=mobjfrj= = Z=afp`lrkq=o^qb= There are other ways to "build up" a discount rate. This method's advantage is that the first three components are quantifiable from public data. The Investment-specific risk premium may be derived from available data in some cases, but in general the appraiser must estimate it. Here are four common methods for determining the discount rate: Opportunity Cost - It represents the highest yield available on investment opportunities at the time a decision is made; Return On Investment (ROI) - many companies use their actual return on investment calculated from historical investment transactions. Some companies use Return on Assets (ROA), Return on Equity (ROE) or Return on Capital (ROC); Weighted Cost of Capital - to arrive at this rate, a company calculates its cost of both debt and equity, weighing each according to its proportion of total capital; and Implicit Rate - this is the rate that makes the present value of the lease payments plus the present value of the unguaranteed residual equal to the cost of the asset. This method equates leasing to an equivalent loan transaction. The implicit rate is also called the lessee's incremental borrowing rate or IBR. Companies also have the option to analyze their investments on a pre-tax or post-tax basis. As you can see, there are various approaches to determining the proper discount rate. Here's a table that shows how much K1, at the end of various periods in the future, is currently worth, with interest at different rates, compounded annually. To use the table, find the vertical column under your interest rate (your cost of capital). Then find the horizontal row corresponding to the number of years it will take to receive the

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payment. The point at which the column and the row intersect is your present value of K1. You can multiply this value by the number of Kwachas you expect to receive, in order to find the present value of the amount you expect.
k=m=s~==~=h~~= VKRB= NMKMB= MKVNPOQO= MKVMVMVN= MKUPQMNN= MKUOSQQS= MKTSNSRQ= MKTRNPNR= MKSVRRTQ= MKSUPMNP= MKSPROOU= MKSOMVON= MKRUMNNT= MKRSQQTQ= MKROVTUT= MKRNPNRU= MKQUPUOQ= MKQSSRMT= MKQQNUQU= MKQOQMVU= MKQMPRNQ= MKPURRQP= MKPSURMS= MKPRMQVQ= MKPPSRPR= MKPNUSPN=

v~= N= O= P= Q= R= S= T= U= V= NM= NN= NO=

VKMB= MKVNTQPN= MKUQNSUM= MKTTONUP= MKTMUQOR= MKSQVVPN= MKRVSOST= MKRQTMPQ= MKRMNUSS= MKQSMQOU= MKQOOQNN= MKPUTRPP= MKPRRRPR=

NMKRB= MKVMQVTT= MKUNUVUQ= MKTQNNSO= MKSTMTPR= MKSMTMMM= MKRQVPON= MKQVTNOP= MKQQVUUR= MKQMTNPS= MKPSUQQV= MKPPPQPU= MKPMNTRQ=

For example, suppose you are designing a building for a big client who wants you to agree to wait for payment of your fees until the building is built and rented out. Let's say he needs five years for this, and let's also say you think you could be earning 10 percent interest on your money if you got your fees upfront. Go to the 10-percent column and slide down to the 5-year row and be dismayed to learn that your today's Kwacha will only be worth 62 ngwee in 5 years (or K00.620921 to be precise. And here's an example of how the table can be used to compute the net present value of a major project by discounting the cash flow. Let's say you're considering the acquisition of a new machine. After all the factors are considered (including initial costs, tax savings from depreciation, revenue from additional sales, and taxes on additional revenues), you project the following cash flows from the machine: `~=c=^=m~= EhNMIMMMF== h=PIMMM== h=PIRMM== h=PIRMM== h=PIMMM=

v~=N== v~=O== v~=P== v~=Q== v~=R==

Assume that your cost of capital is 9 percent; the Net Present Value Table shows whether the new machine would at least cover its financial costs: k=m=s~=~=m~= q~=c~= NKMMMMMM=Z= MKVNTQPN=Z= MKUQNSUM=Z= MKTTONUP=Z= MKTMUQOR=Z=

v~= `~=c= N= EhNMIMMMF== O= h=PIMMM== P= h=PIRMM== Q= h=PIRMM== R= h=PIMMM== kms=Z=hROSKMV=

m=s~= EhNMIMMMKMMF= hOITROKOV= hOIVQRKUU= hOITMOKSQ= hOINORKOU=

- 70 = `~=P= q=~===

Since the net present value of the discounted cash flow is positive, the purchase of the new machine looks like it might be a good decision, but lets stop here for now. We will discuss this further in Chapter 11 when we look at Capital Investment Appraisal. But if you feel hungry for it, why not turn the pages?

PKS==

ibsbi=`^pe=ciltp=J=mbombqrfqfbp=

PKSKN== b~=~=
A perpetuity is a series of equal payments over an infinite time period into the future. Consider the case of a cash payment C made at the end of each year at interest rate i as shown in the following time line: 0 PV 1 C 2 C 3 C

Because the cash flow continues forever, the PV is given by an infinite series. PV = C/ (1+i) + C/ (1+i)2 + C/ (1+i)3 + .. From this infinite series, a usable present value formula can be determined by first dividing each side by (1+i). PV / (1+i) = C / (1+i)2 + C/ (1+i)3 + C/ (1+i)4 +. In order to eliminate most of the terms in the series, subtract the second equation from the first equation: PV PV/ (1+i) = C/ (1+i) Solving for PV, the present value of a perpetuity is given by: PV = C/ i

PKSKO== d==
Sometimes the payments in a perpetuity are not constant but rather, increase at a certain growth rate g as depicted in the following time line: 0 1 2 3

PV

C+ (1+g)

C+ (1+g)2

The PV of a growing perpetuity can be written in the following infinite series: PV = C (1+i) + C (1+g) (1+i)2 +C(1+g)2 +.. (1+i)3

To simply this expression, first multiply each side by (1+g)/ (1+i): PV (1+g) = C (1+g) + C (1+g) 2 + (1+i) (1+i) 2 (1+i) 3 Then subtract the second equation from the first:

- 71 = `~=P= q=~===

PV

PV (1+g) = (1+i)

C (1+i)

Finally, solving for PV yields the expression for the present value of a growing perpetuity as follows: PV = C/ (1-g)

For this expression to be valid, the growth rate must be less than the interest rate, that is g < i==

PKT==

fkci^qflk=^ka=qeb=qfjb=s^irb=lc=jlkbv=

Inflation doesn't sleep. That means the Kwachas you receive today will be worth less in the future. If those Kwachas are part of a structured payment, no matter what the source- Pick a lot prize, insurance settlement or trust, inflation will make the value of today's payments shrink in the coming years. Yet in most cases, the structured payment will never increase to meet inflation. In mainstream economics, inflation is a rise in the general level of prices, as measured against some baseline of purchasing power. The prevailing view in mainstream economics is that inflation is caused by the interaction of the supply of money with output and interest rates. In general mainstream economists divide into two camps: those who believe that monetary effects dominate all others in setting the rate of inflation, or broadly speaking, monetarists, and those who believe that the interaction of money, interest and output dominate over other effects, or broadly speaking Keynesians. Related terms include deflation which is a falling general level of prices, disinflation which is the reduction of the rate of inflation, hyper inflation which is an out of control inflationary spiral and reflation which is an attempt to raise prices to counter act deflationary pressures. Inflation measures are often modified over time, either for the relative weight of goods in the basket, or in the way in which goods from the present are compared with goods from the past. As with many economic numbers, inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost increases, versus changes in the economy. Inflation numbers are averaged or otherwise subjected to statistical techniques in order to remove statistical noise and volatility of individual prices. Finally, when looking at inflation, economic institutions sometimes only look at subsets or "special indexes". One common set is inflation ex-food and energy, which is often called "core inflation". In today's economy, inflation's easy to overlook when planning your financial future. An inflation rate of 4 percent might not seem like much until you consider its effect on the purchasing power of your money over the long term. Over 20 years, 4 percent inflation annually would drive the value of a Kwacha down to K0.44. In the time value of money analysis above, interest rates were assumed to be "real" rates, and the cash flows over the time line were assumed to have the same purchasing power. With inflation the purchasing power of cash flows over a time line declines at the rate of inflation.

PKSKN== o~==k~=`~=c=
Actual Kwacha prices or interest rates are called nominal Kwachas or interest rates. Bonds, loans, and most financial contracts are quoted in nominal interest rates. Nominal rates, adjusted for inflation in a period, are real interest rates, or the rate at which the purchasing power of an investment increases. The real rate of interest is calculated as follows:

- 72 = `~=P= q=~===

1 + real interest rate = 1 + nominal rate/1+ inflation rate The approximate realized real rate is the nominal rate minus the inflation rate for the period. Investors and lenders include expected inflation rates in nominal rates to compensate for the loss of purchasing power. Nominal rates include expected real rates of return plus expected inflation rates.

PKSKO== s~=o~=`~=m~=
Since nominal rates include real rates plus expected inflation, discounting nominal future cash flows by nominal rates will give the same answer as discounting real, expected inflation adjusted cash flows by the real interest rate. Current Kwacha cash flows must be discounted by the nominal interest rate; real cash flows must be discounted by the real interest rate.

PKSKP== m==o=
Expected inflation is a significant variable in retirement planning, tuition savings plans, choice of vocation, or any long-term financial planning. Even a low rate of inflation can have a major negative effect on people who will receive relatively fixed nominal income or returns. The actual purchasing power rate of return (real rate) on an investment is the nominal expected rate of return, 1+r, divided by 1 + the expected inflation rate. With high inflation, the realized real rate may be negative.

PKSKQ= o~==k~\=
Most financial analyses in this text will assume nominal rates and will discount nominal cash flows. When one set of cash flows are presented in real term, such as the social security cash flows, then nominal cash flows and rates must be adjusted to compare, contrast, and mix the cash flows. As noted above, do not mix nominal and real or you will have garbage!

PKT==

lsbosfbt=afp`rppflk==

PKTKN== t=a=j=e~=~=q=s~\=
Money has a time value. This is because individuals have a preference for current consumption since they gain satisfaction from consuming goods and services. In order to convince an individual to postpone that consumption (and to save or invest the money), people are given some compensation. That compensation usually comes in the form of an investment return or interest earnings. Since a Kwacha that is saved or invested has the power to increase over time (if the earnings are reinvested), a Kwacha amount invested today becomes a greater Kwacha amount in the future. For Kwacha amounts in the present, we use the term "Present Value" or the initials "PV". For Kwacha amounts at some point in the future, we use the term "Future Value" or the initials "FV".

PKTKO== c~~=o~=
The fundamental relationship is as follows: For a specific Kwacha amount today (the present value or PV), the associated future value (FV) will be larger, given a positive rate of return (or a positive interest rate).

- 73 = `~=P= q=~===

For a specific Kwacha amount at some point in the future (a future value or FV), the present value today (or PV) will be smaller, given a positive rate of return (or a positive interest rate). If we consider K100 invested today (a PV) in an account that pays interest, that K100 will grow to a greater amount in the future. If we consider a K100 payment that is made 3 years from today (a FV), the associated present value of that amount will be less than K100.

=PKTKP== f~==p~=`~=c==m=s~=q=
The fact that money has a time value means we must take this time value of money into consideration when we are making financial decisions. We do this by restating money values through time with Time Value of Money Calculations. Once the methods of restating money values through time is mastered, they can be used for restating cash flows in such a way as to make them comparable in the financial decision making process. By stating all future cash flows in terms of present values, we can compare them. The calculation of present values is the foundation for many financial decision making processes including the area of capital budgeting.

PKTKQ== qsj=`~~==
Time value of money calculations are used to shift Kwacha values through time. They can be used to state future Kwacha flows in present value terms or to restate current Kwachas into future Kwacha values. The calculations are the most powerful tool available for making financial and business decisions. They allow numerous calculations related to the earning of interest, the earning of non-interest returns on investments, loan related problems, capital budgeting decision processes, insurance programming problems, and almost any asset purchase decision. They also provide the foundation for some of the most widely used valuation concepts and valuation models employed in finance. There are just four fundamental time value of money calculations. These four types of calculations provide the basis for most of the financial calculations preformed by financial managers. 1. 2. 3. 4. Future Value of a Kwacha calculation (FV) Present Value of a Kwacha calculation (PV) Future Value of an Ordinary Annuity (FV oa) Present Value of an Ordinary Annuity (PV oa)

PKTKR== o~====`~~=
Once the FV problem and the related equation is understood, it is found that the PV problem and its equation is just the opposite (the inverse) of the FV process. Furthermore, the Annuity problems are shown to be nothing more than a series of the simpler FV and PV problems. In reality, once the first and most fundamental type of time value calculation is mastered, all the calculations become simple.

PKTKS== q==c~~=`~~=r=qsj==
Even the most complicated financial modeling problems can be broken down into component parts and can be addressed with these four types of time value of money problems.

- 74 = `~=P= q=~===

PKTKT== i~=~=W==
All automobile loans, equipment loans, home mortgage loans, and credit card loans that require a periodic payment (such as a monthly payment) that contains both interest due and a payment on the loan principal are often called loan amortization problems. They are, in reality, nothing more than PV of an Annuity problem. The types of questions answered with this calculation include: How much is the monthly payment? When will the loan be paid off? What is the mortgage interest expense deduction for tax purposes? Given my monthly gross salary, how much of a home mortgage will I qualify for?

PKTKU== `~~===~===W==
All business investment decisions should be based on Discounted Cash Flow (DCF) decision tools such as Net Present Value (NPV). Once the incremental after-tax cash flows associated with an investment project are identified, the process of calculating the NPV is nothing more than a series of PV and PV of Annuity calculations. The questions answered with capital budgeting decisions are: Does the project have a positive Net Present Value? Does the project have a percentage return that is greater than our cost of capital? If we undertake this project, will we increase the economic value of our firm? Are the incremental benefits of the project greater than the incremental costs?

PKTKV== m~==W==
Personal decisions to invest in securities such as bonds and stocks create the problem of how to decide what the security might be worth. There are a number of different valuation methods that are used to determine what the economic value of the cash flows associated with an investment are. These models rely on the PV calculations to arrive at these values. The types of questions answered are: What price do I think is fair for that share of stock? What am I willing to pay for that bond? What is the true value of that franchise package? Is it worth it to invest in rental property?

PKTKNM==

o=~W==

Whether an individual is saving through a pension fund, or a life insurance policy, an understanding of how future wealth is created is essential for proper decision making. All retirement planning is based on FV and FV of Annuity problems. The main questions answered are: How much money do I need to retire? How much of an annual income will that provide to me? How much do I need to save now every year if I am to meet my goals? As you can see, the basis of many fundamental financial decisions is Time Value calculations.

- 75 = `~=P= q=~===

PKU==

`e^mqbo=prjj^ov=

Have you ever paid for something with monthly payments? Suppose you wanted to buy a K90 million house in PHI and were told the payments would be K7 million for 48 months. How would you know whether you were being offered a good deal, a fair deal or a bad deal by the National Housing Authority? This chapter has taught you how to answer such questions. It was devoted to the TVM principle. You have learnt how to determine the PV of future cash flows and more generally, how to value at one point in time cash flows that actually occur at other points in time. Financial decisions are measured by their NPV the present value of the expected future cash flows minus the cost. The NPV is the value created or lost by a decision. Therefore, to be successful, firms must find positive NPV opportunities and avoid negative NPV choices. The value today of a future cash flow is called the present value. The present value computation solves for the original investment at a certain rate when one knows the future value. The present value is the reciprocal of the future value calculation. Present value (1+r) t = future value, while the present value (PV) = 1/ (1+r) t x future value. The interest rate used to compute present values of future cash flows is called the discount rate. This will be an important variable when value determination is studied in a later chapter. Present values are directly related to the future cash flows and inversely related to the discount rate, r, and time, t. The higher the future cash flows, the higher the PV; the higher the discount rate and longer the term, the lower the PV. The expression, 1/ (1+r) t is called a discount factor, which is the PV of a K1 future payment. Discount factors for whole number discount rates and years are calculated and available for use. Cash flows occurring at different time periods are not comparable for financial decision making. The cash flows must be time adjusted at an appropriate discount rate, usually to the "present" for comparison, summation, or other analysis. A time line presentation helps students visualize the concept.

- 76 = `~=P= q=~===

PKT==

bu^jfk^qflk=pq^ka^oa=nrbpqflk=

= = wfmmlo^e=j_btb=
Assume that it is now 1 January 2007. On 1 January 2008, Zipporah intends to deposit K1, 000 into a savings account at one of the local commercial banks paying an 8% interest rate. Required: a. Assuming that the bank compounds interest annually, how much will Zipporah have in her savings account on 1 January 2011? b. What would Zipporahs 1 January 2011 balance be if the bank used quarterly compounding rather than annual compounding? c. Suppose Zipporah deposited the K1, 000 in 4 payments of K250 each on 1 January 2008, 2009, 2010 and 2011. How much would she have in her savings account on 1 January 2011, based on 8% annual compounding? d. Suppose Zipporah deposited 4 equal payments in her savings account on 1 January 2008, 2009, 2010 and 2011. How large would each of her payments have to be for Zipporah to obtain the same ending balance as the one calculated in part (a) above?

^kptboW=
a. K1, 000 is being compounded for three years so Zipporahs balance on 1 January 2011 is calculated to be K1, 259.71. This is arrived at as follows: FV = PV (1+i) t = K1, 000 (1+ 0.08) 3 = K1, 259.71 b. The effective annual interest rate for 8%, compounded quarterly is calculated as: EAR = (1 + 0.08/4) 4 1.0 = (1.02) 4 1.0 = 0.0824 = 8.24%. Therefore, the FV = K1, 000 (1.0824) 3 = K1, 000 (1.2681) = K1, 268.10. c. As you work this problem, keep in mind that the tables assume that payments are made at the end of each period. Therefore, you must solve this problem by finding the future value of an annuity of K250 for years at 8%. PMT (FVIFA k, n) = K250 (4.5061) = K1, 126.53 d. FV = K1, 259.71; i = 8%; t=4. PMT (FVIFA 8%, 4 years) = FV PMT (4.5061) = K1, 259.71 PMT = K1, 259.71 / 4.5061 = K279.56 Therefore, Zipporah would have to make 4 payments of K279.56 each to have a balance of K1, 259.71 on 1 January 2011.

*************************************************************

- 77 = `~=P= q=~===