Principles of Finance (FINN 100)

Assignment 2
Submission Deadline – Thursday 27 February, 6:30 PM

1. Your friend, a non-finance student, wants to deposit PKR100,000 into an account

paying 9% annual interest either today or exactly 10 years from now. How much
better off will he or she be at the end of 40 years if initial deposit was made today
rather than 10 years from now? (Show complete working)

2. If deposits are made into an account paying annual interest of 12%, for each of the
mixed streams of cash flows shown in the table, determine the future value at the
end of the final year assuming that no withdrawals are made during the period and
that the deposits are made:

a. At the end of each year.

b. At the beginning of each year.

Cash Flows
Year A B C
1 9000 300000 12000
2 10000 250000 12000
3 12000 200000 10000
4 100000 19000
5 50000

(Show complete working for all parts)

3. For each of the cases in the following table:

a. Calculate the future value at the end of the specified deposit period.
b. Determine the effective annual rate.
c. Compare the nominal annual rate to the effective annual rate. What relationship
exists between compounding frequency and the nominal and effective annual
rates?

(Show complete working in all parts)

Ca Amount of Nominal Compounding Frequency Deposit Period

se Initial Deposit Annual Rate (times/year) (Years)
A 25000 6 percent 2 5
B 500000 12 percent 6 3
C 10000 5 percent 1 10
D 200000 16 percent 4 6
 Principles of Finance (FINN 100)

4. For each of the cases in the following table, find the future value at the end of the
deposit period, assuming that interest is compounded continuously at the given
nominal annual rate. (Show complete working)

Case Amount of Initial Deposit Nominal Interest Rate Deposit Period (year)
A 10000 9 percent 2
B 6000 10 percent 10
C 40000 8 percent 7
D 25000 12 percent 4

5. Mushtaq Ahmad wishes to determine the future value at the end of 2 years of a
PKR15,0000 deposit made today into an account paying a nominal annual rate of
12%.

a. Find the future value of Mushtaq’s deposit, assuming that interest is

compounded (1) annually, (2) quarterly, (3) monthly, and (4) continuously.
b. Compare your findings in part a, and use them to demonstrate the relationship
between compounding frequency and future value.
c. What is the maximum future value obtainable given the PKR15,0000 deposit, the
2-year time period, and the 12% nominal annual rate? Use your findings in part a
to explain.

(Show complete working in all parts)

6. Yusuf Raza is looking for a used bicycle. He has found one priced at PKR4,500. The
dealer has told Yusuf that if he can come up with a down payment of PKR500, the
dealer will finance the balance of the price at a 12% annual rate over 2 years (24
months).

a. Assuming that Yusuf accepts the dealer’s offer, what will his monthly (end-of-
month) payment amount be?

b. Find out what Yusuf’s monthly payment would be if the dealer were willing to
finance the balance of the car price at a 9% annual rate.

(Show complete working)

7. You are saving for the university education of your two children. One child will
enter university in 5 years, while the other child will enter university in 7 years.
University costs are currently $10,000 per year and are expected to grow at a rate of 5
percent per year. All university costs are paid at the beginning of the year. You
assume that each child will be in university for four years. You currently have
$50,000 in your educational fund. Your plan is to contribute a fixed amount to the
fund over each of the next 5 years. Your first contribution will come at the end of
 Principles of Finance (FINN 100)

this year, and your final contribution will come at the date at which you make the
first tuition payment for your oldest child. You expect to invest your contributions
into various investments, which are expected to earn 8 percent per year. How much
should you contribute each year in order to meet the expected cost of your children's
education?

(Show complete working)