SUBMITTED TO: Ma’am Nadia Riaz

COURSE : Principles of Finance

Wednesday :11.45-2.45

GROUP :M

MEMBERS : Tuba Tahir (G.L) (40119)

Nimra Nazakat (39524)
Amal Saeed (41200)
Muhammad Ahsan Atif (33441)
Sooraj Kumar (37203)
Muhammad Annus Rafiq (34832)

Time Value Money

Question # 7

South Penn Trucking is financing a new truck with a loan of $10,000 to be repaid in 5 annual
end-of-year installments of $2,504.56. What annual interest rate is the company paying?

Answer:
Principle loan amount = P = 10,000
Fixed annual installment = A = 2504.56
Loan Tenure = n = 5 year

Let interest rate (annual) = r

Formula:

A = Pr (1 + r) n
(1+ r) n – 1
Assume r = 5% per year

A = 10,000x0.05x (1+ 0.05)5

(1+0.05)5 - 1

A = 2309.76

As calculated A is less than 2504.56, we need rate which is greater than 5.

Let’s assume rate of 8%

Putting data into formula:

A = 10,000x 0.0.8x (1+0.0.8)5

(1+0.08)5 – 1

A= 2504.55
Thus, r = 8 % per year is the correct rate of interest.

Question # 8

Bank A: 8%, monthly.

EAR A = (1 +0.08/12) ^12
EAR A = 8.30%.
Bank B: 9% monthly
Interest due at end of year EAR B = 9%.
So, 9.00% - 8.30% = 0.70% (answer).

Question # 9
DATA:

N=5

PV=15000

r=12%

Pmt = ?

Solution:
FORMULA: PV=Pmt(1-(1+r)-n/r)

PV=Pmt(1-(1+r)-n/r)

Pmt= 15000/(1-(1+0.12)-5/0.12)

PMT= 4161

NOW AMORTIZATION:

yearly PMT INTEREST PRINCIPLE LOAN BALANCE

0 4161 15000*12%

1 4161 1800 2361 12639*12%

2 4161 1516 2645 9994*12%

3 4161 1199 2962 7032*12%

4 4161 844 3317 3715*12%

5 4161 445 3175 0

QUESTION#10

DATA:
N=3
PV=20000
r=12%
pmt?
SOLUTION:
FORMULA: PV=Pmt(1-(1+r)-n/r)
PV=Pmt(1-(1+0.12)-3/0.12)
20000/(1-(1+0.12)-3/0.12)
PMT=8326.97= 8327
NOW AMORTIZATION:
yearly PMT INTERES PRINCIPLE LOAN
T BALANCE
0 8327 20000*12%
1 8327 2400 5927 14073*12%
2 8327 1689 6638 7435 *12%
3 8327 892 7435 0
Question # 11

Solution:
To find your yield to maturity, Perpetuity value = PMT/I.
So,15625 = 1250/I. I = 0.08
The answer to the final part, using a financial calculator:
N = 20; I = 8; PMT = 1250; FV = 0
Compute P.V:-
PV = 12,272.69

Question # 12
0 1 2 3 4 5
|____|______|_____|_____|______|
| | | | | |
1.2 1.6 2.0 2.4 2.8
CFo = 0
CF1 = 1.2
CF2 = 1.6
CF3 = 2.0
CF4 = 2.4
CF5 = 2.8
I = 10%

0 1 2 3 4 5 |____|____|______|______|_____|
PMT PMT PMT PMT PMT PMT

NPV = ? 7.2937 + 1.0  PV= 8.2937

N=5
i= 10
Bgn PMT = $1.98895