OPEN UNIVERSITY of MAURITIUS

Assignment Cover Sheet

Name of Learner Kartic Sunnia

OU Learner ID Number 202302175

Full Programme Title Finance & Law Year Semester

1 1

Name of Part-Time Lecturer Mr Boolaky Ashish Kumar

Module Title Financial Theory and Practice 1

Assignment Number 1 Please Tick First Submission Re-sit Re-

as Appropriate Submission

Assignment Due Date 20/04/2023 Date Assignment is No. of Words: (Where

Submitted Applicable)
18/04/2023 1189

Query from Learner to Part-Time Lecturer

............................................................................................................................................................................
...........................................................

............................................................................................................................................................................
...........................................................

Learner’s Declaration:
I certify that I have not plagiarised the work of others or participated in unauthorised collaboration when
preparing this assignment. No part of this assignment has been previously submitted as part of another
unit/course. (In case assignment is being submitted by email, the learner must type his/her name in upper-
case letters).

Signature of Learner: .KARTIC SUNNIA.. Date:....18/04/2023..........

 Table to be filled in by Part-Time Lecturer

Basis of Assessment
(This may change for different assignments)
Weighting % Marks Awarded Marker's Comment/s

Presentation and Style 10

Evidence of Reading/Application of Theory 20

Logical Development/Discussion of the Topic 30

Development of Insight 30

Conclusion 10

Total Marks Awarded 100

General Comment and recommendation:

............................................................................................................................................................................
...........................................................

............................................................................................................................................................................
...........................................................

............................................................................................................................................................................
...........................................................

Signature of Part-Time Lecturer: …………..………….. Date:…………............…….……….

a) Assume Jhonny pay a rent of MUR 1,200 monthly due on the first day of every month. If the annual
interest rate is 8 %, the present value of a full year’s rent. (2 marks)

To calculate the present value of a full year's rent, we can use the formula for present value of an annuity:
PV = A * [1 - (1 + r)^-n] / r
First, we need to calculate the monthly KEY
interest rate: PV is the present value
r = annual interest rate / 12 A is monthly rent
r = 8% / 12 r is monthly interest rate (interest rate per period)
r = 0.00666667 n = 12 months (the number of periods)

Next, we solve for PV:

PV = 1200 * [1 - (1 + 0.00666667)^-12] / 0.00666667
PV = 1200 * [1 - 0.921901] / 0.00666667
PV = 1200 * 0.078099 / 0.00666667
PV = 14060.74
Therefore, the present value of a full year's rent at an annual interest rate of 8% is Rs 14,060.74.

b) Nazim plans to pay for her son’s postgraduate degree for 4 years starting 8 years from today. He
estimates to pay an annual tuition fee will be $40,000 once his son starts his course. The tuition fees are
payable at the beginning of each year. How much money must Nazim invest every year, starting one year
from today, For the next seven years? Assume the investment earns 10 % annually. (4marks)

The present value of the tuition payments can be calculated using the formula for the present value of an
annuity:
KEY
PV is the present value of the tuition payments,
PV = A * ((1 - (1 + r)^-n) / r)
A is the annual tuition fee
r is the annual interest rate
In this case, A is $40,000, r is 10%, n is
n is the number of years over which the tuition payments will be
4, and the payments are made at the
made
beginning of each year.

Therefore, the present value of the tuition payments is:

PV = 40,000 * ((1 - (1 + 0.1)^-4) / 0.1) = $126,536.92

This means that Nazim needs to invest $126,536.92 starting one year from today, in order to accumulate
enough money to pay for his son's tuition over the next four years, assuming a 10% annual return.

Now to calculate how much Nazim needs to invest each year. We can use the formula for the future value of
an annuity:

FV = PMT * ((1 + r)^n - 1) / r KEY

FV is the future value
We can rearrange the formula TO PMT is the annual payment
r is the annual interest rate
PMT = FV * r / ((1 + r)^n - 1) n is the number of years over which the payments will be made

PMT = 126,536.92 * 0.1 / ((1 + 0.1)^7 - 1) = $14,216.97

Therefore, Nazim needs to invest $14,216.97 every year for the next seven years

c) Sheshna is expected to receive $10,000 five years from today, at a discount rate of 9% compounded
monthly. Calculate the present value. (2 marks)

To calculate the present value of the $10,000 payment that Sheshna is expected to receive in five years, we
need to use the present value formula for a future lump sum payment, which is:
PV = FV / (1 + r)^n

Since the discount rate is compounded monthly, we need to convert it into a monthly rate by dividing it by 12:
r = 9% / 12 = 0.0075

The number of periods is the total number of months in five years, which is:
n = 5 years x 12 months/year = 60 months

KEY
PV = 10,000 / (1 + 0.0075)^60 PV = 10,000 FV is the future value
/ 1.626376 PV = $6,146.90 r is interest rate
n is total number of months
Therefore, the present value is $6,146.90.
d) A person wishes to borrow Rs 2,500,000 which will be repaid over a period of 35years on a monthly
basis. He has been told that the Annualised Percentage Rate is 6%. What should be his monthly payment?
(2 marks)

To calculate the monthly payment, we can use the formula for the present value of an annuity:
P = (A / r) * (1 - (1 + r)^(-n))

First, we need to convert the annual percentage rate (APR) to a monthly rate. We can do this by dividing the
APR by 12:
r = 0.06 / 12 = 0.005

Next, we need to calculate the total number of payments over 35 years

n = 35 * 12 = 420 months (n is the total number of payments)

Now we can solve for A:

P = 2,500,000 r = 0.005 n = 420
A = (P * r) / (1 - (1 + r)^(-n)) = (2,500,000 * 0.005) / (1 - (1 + 0.005)^(-420)) = Rs 15,925.57

Therefore, the monthly payment for a loan of Rs 2,500,000 at an APR of 6%, to be repaid over 35 years (420
months) would be approximately Rs 15,925.57.

Welding Construction ltd is considering the purchase of a machine. Two machines JCB and Catapillar, each
costing $50000 are available. The earnings from the two machines are expected to be as follows:
Year JCB $ CATAPILLAR $
1 15000 5000
2 20000 15000
3 25000 20000
4 15000 30000
5 10000 20000

Evaluate the two alternatives using the capital budgeting techniques with 10%discount rate and rate of
return and provide detailed reasons which machine should be selected. (10 marks)
To evaluate the two alternatives using capital budgeting techniques, we can use two methods: Net Present
Value (NPV) and Internal Rate of Return (IRR).

Net initial outlay (Costing): 50000*1.00 = $50000

Year 1: 15000/(1+0.1)^1 = $13,636.36
Year 2: 20000/(1+0.1)^2 = $16,528.93 NPV of JCB = $50000 -

Year 3: 25000/(1+0.1)^3 = $19,572.39 ($13,636.36 + $16,528.93 +

Year 4: 15000/(1+0.1)^4 = $10,408.28 $19,572.39 + $10,408.28 +

Year 5: 10000/(1+0.1)^5 = $6,209.68 $6,209.68) = $16,355.64

NPV of JCB = $16,355.64

Caterpillar:

Net initial outlay (Costing): 50000*1.00 = $50000

Year 1: 5000/(1+0.1)^1 = $4,545.45
Year 2: 15000/(1+0.1)^2 = $11,570.25 NPV of Caterpillar = $4,545.45 +

Year 3: 20000/(1+0.1)^3 = $13,774.98 $11,570.25 + $13,774.98 +

Year 4: 30000/(1+0.1)^4 = $17,109.04 $17,109.04 + $11,462.48 -

Year 5: 20000/(1+0.1)^5 = $11,462.48 $50,000 = $8,462.20

NPV of Caterpillar = $8,462.20

Based on the NPV method, we can see that JCB has a higher NPV of $16,355.64 compared to Caterpillar's NPV
of $8,462.20. Therefore, JCB would be the better choice.

Using Internal Rate of Return (IRR) method:

The IRR is the discount rate that makes the NPV of the investment equal to zero. We can calculate the IRR for
each machine using the cash flows provided.
JCB: IRR = 13.52% NPV of Caterpillar = $4,545.45 +
$11,570.25 + $13,774.98 +
Caterpillar: IRR = 8.06% $17,109.04 + $11,462.48 -
$50,000 = $8,462.20

We can see that the IRR for JCB is higher than that of Caterpillar. Therefore, using the IRR method, we would
select JCB.

In conclusion, both the NPV and IRR methods suggest that JCB is the better choice. Therefore, Welding
Construction ltd should consider purchasing JCB

An investor can reduce portfolio risk simply by holding stocks which are not perfectly correlated. Discuss?
(10 marks)

An investor can reduce portfolio risk by holding stocks that are not perfectly correlated. This is because
correlations between different stocks indicate the extent to which they move together in response to market
changes. When stocks are perfectly correlated, they move in the same direction by the same amount. On the
other hand, when stocks are not perfectly correlated, they may move in different directions or by different
amount in response to market changes.
By holding a portfolio of stocks with low or negative correlations, an investor can achieve diversification
benefits. When one stock in the portfolio is performing poorly, the other stocks may be performing well and
offset the losses, leading to a reduction in portfolio risk. This is because the losses in one stock are not likely to
be mirrored by losses in other stocks in the portfolio.
However, it is important to note that the benefits of diversification may be limited if the stocks in the portfolio
are highly correlated during times of market stress, such as during a financial crisis. This is known as systemic
risk, which cannot be diversified away by holding a portfolio of stocks.
Therefore, while holding stocks that are not perfectly correlated can reduce portfolio risk, it is important to
ensure that the stocks in the portfolio are diversified across different sectors and industries, and that the
portfolio is updated on a timely basis to maintain its diversification benefits. Additionally, investors may want
to consider other asset classes, such as bonds or real estate, to further diversify their portfolios and reduce
overall risk. There is a wonderful quote from Don Quixote by Miguel de Cervantes, It reads: […] ’is the part of
a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.