ACF 319

MAKE UP ASSIGNMENT

Name and Surname Student Id and Programme

Gcina Lukhele 202100586 (B.Comm)
Nomalungelo Nkhambule 202100465 (B.Comm)
Tandzisile Sinkala 202101169 (B.Comm)
Siphesihle Mabilisa 202100494 (B.Comm)
Philile Matsebula 202101108 (B.Comm)
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TABLE OF CONTENT PAGE NUMBER

QUESTION 1
1.1 Calculations of PVA and FV……………………………………………2
1.2 APR and EAR calculations……………………………………………...3
1.3 Passion calculations……………………………………………………..4
Question 2
2.1 Market Value of Stock…………………………………………………..5
2.1 Amortization schedule…………………………………………………..6
2.3 Calculations of Vusi payments………………………………………….7
Question 3
3.1 Supplemental operational cash flow……………………………………8
3.2 Coefficient of Variation………………………………………………...8-9
3.3 Average Return and Standard Deviation of Stocks…………………….9
Question 4
4.1 Value of Apartment and Mortgage loan repayment…………………...10
4.2 Payback and NPV of projects………………………………………….11-12
References ………………………………………………………………….13
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Question 1

1.1

1
1−( )
1+𝑟𝑛
a) PVA = PMT[ ]
𝑟

Whereby
PMT=$ 10 000
n=4
r = 0.07
1
1−( )
1+0.074
PVA=10 000[ ]
0.07

=$33 872.11

b) FVn = PV(1+r)n

Whereby

PV = $33 872.11

n=1

r = 0.07

FVn = 33 872.11(1+0.07)1

= $ 36 243.16 - $ 10 000

= $ 26 243.16
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1.2

$168 925−$150 000

a) APR = [ ]
$150 000

0.1261666666
=
18

Monthly =0.007009259

Therefore, the APR = monthly × 12

= 0.007009259 × 12

= 0.084111108 × 100

= 8.41%

𝑟𝑠𝑖𝑚𝑝𝑙𝑒 𝑚
b) rEAR = [1 + ] -1.0
𝑚

whereby

rsimple = 0.084111108

m=4

0.084111108 4
rEAR = [1 + ] – 1.0
4

= 0.08680319 × 100

= 8.68%

1.3

1
1−( )
(1+𝑟)𝑛
a) PVAn = PMT[ ]×[1+r]
𝑟

Whereby

PVA = $10 000

r = 0.12/12=0.01
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n = 4×12 = 48

1
1−( )
1+0.0148
$10 000 = PMT[ ]×[1+0.01]
0.01

$10 000 = PMT (38.35369909)

$10 000
PMT = 38.35369909

= $260.73

1
1−( )
(1+𝑟)𝑛
b) PVA = PMT[ ]
𝑟

Whereby

PVA = $10 000

r = 0.12/12=0.01

n = 4×12 = 48

1
1−( )
(1+0.01)48
10 000 = PMT[ ]
0.01

10 000 = PMT (37.97395949)

PMT = 10 000/37.97395949

= $263.34
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Question 2

2.1

Step 1: Non-constant growth dividend

D1 = E1.50

D2 = E2.00

Computing the present value of non-constant growth dividend

𝐸1,50 𝐸2,00
PV of constant growth = +
1+0.11 1+0.11

=E 2.974596218

Step 2: Computing the first constant growth dividend

D3 = D2(1+g)

= 2.00(1+0.05)

= 2.10

Value of stock at the end of year 2

2.10
P3 =
0.11−0.05

= E35.00

Computing present value of P2

35.00
PV of P2 =
(1+0.11)2

= E 28.40698516

Step 3

Computing the market value of the stock

E 2.974596218 + E 28.40698516

= E 31.38
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2.2

1
1−( )
(1+𝑟)𝑛
PVA = PMT[ ]
𝑟

Whereby

PVA = E 25 000

r = 0.10

n=5

1
1−( )
(1+0.10)5
25 000 = PMT[ ]
0.10

25 000 = PMT (3.790786769)

PMT= 25 000/3.790786769

= E 6 594.94

Year Beginning Payment Interest Payment Remaining

Balance (E) (E) Paid (E) Principle Balance
(E) (E)
1 25 000 6 594.94 2 500.00 4 094.94 20 905.06
2 20 905.06 6 594.94 2 090.51 4 504.43 16 400.63
3 16 400.63 6 594.94 1 640.66 4 954.88 11 445.75
4 11 445.75 6 594.94 1 144.58 5 450.40 5 995.59
5 5 995.39 9 594.94 599.54 5 995.40 -0.01
Total 32 974.70 7 975.29 25 000.01

a) They will pay E 2 090.51

1
1−( )
(1+0.10)5
b) 100 000 = PMT[ ]
0.10

100000 = PMT (3.790786769)

PMT= 100 000/3.790786769
= E 26 379.76 which is four times bigger
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2.3

1
1−( )
(1+𝑟)𝑛
a) PVA = PMT[ ]
𝑟

Whereby:

PVA=50 000

r = 0.032/12 = 0.00266666

n = 10×12= 120

1
1−( )
(1+0.00266666)120
50 000 = PMT[ ]
0.00266666

50 000 = PMT [ 102.5781126]

50 000
PMT =
102.5781126

= E487 43
1
1−( )
(1+𝑟)𝑛
b) PVA = PMT[ ]
𝑟

Whereby

PMT = E487.43

r = 0.032/12 = 0.00266666

n = 7×12 = 84

1
1−( )
(1+0.00266666)84
PVA = 487.43[ ]
0.00266666

PVA = E36 638.87

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Question 3

3.1 The Annual Supplemental Operational Cash Flow for Mbabane Millers

Additional net income 110 000

Less: depreciation 84 000

Net operational cash flow 26 000

Taxes based on operational cash flow (8 884)

Net cash flow 17 160

Add: Depreciation 84 000

Supplemental Operational Cash flow 101 160

3.2

NPV Probability
19 800 0.7
(20100) 0.1
31500 0.2

Expected NPV = 0.7(19 800)+0.1(-20 100)+0.2(31500)

= 13 860-2 010+6 300

= E18 150.00

Standard
deviation=√0.7(19800 − 18150)2 + 0.1(−20100 − 18150)2 + 0.2(31500 − 18150)2

= √1905750 + 146306250 + 35644500

=13 559.36942
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CV = 13 559.36942/18150

= 0747072697

The coeffient of variation is 0.7 which is less than eight therefore the firm will invest.

3.3

Year Stock A Returns Stock B Returns The rate of return on portfolio

% % consisting 50% of A and 50% of B
1 -10 -23 -10(0.5)+0.5(-23) = -16.50
2 18.50 21.29 18.50(0.5)+21.29(0.5) = 19.895
3 38.67 44.25 38.67(0.5)+44.25(0.5) = 41.46
4 14.33 3.67 14.33(0.5)+3.67(0.5) = 9
5 33.00 28.30 33.00(0.5)+28.30(0.5) = 30.63
Mean 18.9 14.902 16.897

(16.50)+19.895+41.46+9+30.63
b. Average Return of portfolio = 5

= 16.897

√(−10−18.9)2 +(18.5−18.9)2 +(38.67−18.9)2 +(14.33−18.9)2 +(33.00−18.9)2

c. i) SD of stock A = 5−1

= 19.01

√(−23−14.902)2 +(21.29−14.902)2 +(44.25−14.902)2 +(3.67−14.90+(33.00−18.9)2

ii)SD of stock B = 5−1

= 25.7

iii) SD of portfolio=

√(−16.5 − 16.897)2 + (19.895 − 16.897)2 + (41.46 − 16.897)2 + (9 − 16.897)2 + (30.63 − 16.897)2

5−1

= 22.24
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Question 4

a) FV = PV (1+r)n

Whereby

n = 25 PV = 1 000 000

r = 0.09

FV = 1 000 000(1+0.09)25

= R 8 623 080.66
1
1−( )
(1+𝑟)𝑛
b) PVADUE = PMT[ ]×[1+r]
𝑟

Whereby
r = 0.06/12 = 0.005
n = 12×25 = 300
PVA = 1 000 000

1
1−( )
(1+0.005)300
1 000 000 = PMT[ ]×[1+0.005]
0.005

1000000
PMT = 155.9828983

= R 6 410.96

c) Net amount = R 6 410.96 – R 5 000.00

= R 1 410.96
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4.2

a) Cash flows are used in determining the payback period, net present value and internal rate
of return because they provide more accurate representation of the actual cash inflows and
outflows generated by an investment or project and for the following reasons:

payback period: using cash flows instead of profit flows ensures that only the actual cash
received from the project are considered, disregarding any non-cash accounting entries such as
depreciation or amortization.

Net Present Value: using cash flows instead of profit flows will help to provide a more accurate
measure of investments profitability as cash flows accounts for the time value of money and
reflect actual cash generated or spent each period.

Internal Rate of Return: cash flows can be used to calculate IRR as they reflect the actual cash
generated or spent, allowing for a more precise determination of the rate at which the
investments or earns a certain return.

b) NPV

Project A = (40 000+25 000)+(5 000+25 000)+(5 000+25 000)+(-15 000+25 000)

= -100 000/(1.12)0+65 000/(1.12)1+30 000/(1.12)2+30 000/(1.12)3+10 000/(1.12)4

= -100 000+58 035.71+23 915.82+21353.42+6 355.18

= R 9 660.12

Project B = (10 000+ 25 000) +(10 000+25 000) +(10 000+25 000) +(10 000+25 000)

= -100 000/(1.12)0+35 000/(1.12)1+35 000/(1.12)2+35 000/(1.12)3+35 000/(1.12)4

= -100 000+31 250+27901.79+24 912.31+22243.13

= R6 307.23
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Payback period

Project A

cash flow per 2 years = 95 000

Balance outlay = 100 000-95 000=5 000

Cash flow every 3 years = 30 000

2 years + 5000/30 000= 3.1667 years

Therefore, the payback period is 3.1667 years

Project B

Cash flow every 2 years = 70 000

Balance outlay = 100 000- 70 000=30 000

Cash flow per 3 years = 35 000

3 years + 30 000/35 000= 3.857 years

therefore, the payback period is 3.875 years

c. Project A should be accepted if this projects are mutually exclusive because of its high net
present value and short payback period when compared to project B.
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REFERENCES

1. Adam, T. & Goyal, V.K. 2008. The investment opportunity set and its proxy variables.
The Journal of Financial Research, 31(1): 41-63.
2. Brealey,R.A., Myers, S.C. & Allen, F. 2007. Principles of corporate finance. 9th Ed.
New Jersey: McGraw Hill
3. Fama, E.F. & French, K.R. 2005. Financing decisions: who issues stock? Journal of
Financial Economics, 76 (3): 549-582.
4. Van Wyk, K., Botha, Z. and Godspeed, I. (2012), Understanding South African
Financial Markets, 4th Edition, Van Schaick Publishers.
5. https://www.emerald.com