Federal Urdu University of Arts, Science and Technology, Islamabad

FEDERAL URDU UNIVERSITY OF ARTS, SCIENCE AND
TECHNOLOGY, ISLAMABAD
DEPARTMENT OF BUSINESS ADMINISTRATION
FINAL-TERM EXAM BBA 2nd SEMESTER Spring-2020
Student’s MIS ID: 26189 Class Section: 3B Session: Morning
Enrollment No: Student’s Name: Qasim Jahangir warrich_______
Student’s Email: [email protected] WhatsApp No.03405860517_____
Father Name: _jahangir akhtar___________Subject : Finance_____
Assignment 3
(From the book of Vane Horne)
1. Emerson Commack wishes to purchase an annuity contract that will pay him $7,000 a year for
the rest of his life. The Philo Life Insurance Company figures that his life expectancy is 20 years,
based on its actuary tables. The company imputes a compound annual interest rate of 6 percent in
its annuity contracts.
a. How much will Commack have to pay for the annuity?
b. How much would he have to pay if the interest rate were 8 percent?
Ans : a) R = 7000
n = 20 I = 6%
PVA(i,n)=R [(1-1/(1+i)^n )/i]

PVA(i,n)= 7000[(1-1/(1+0.06)^20)/0.06]
= 7000[16.47] =80290
b) i = 8%
PVA(i,n)= 7000[1-1/(1+0.08)^20)/0.08]
= 7000[9.82] = 68740
2. Joe Hernandez has inherited $25,000 and wishes to purchase an annuity that will provide him
with a steady income over the next 12 years. He has heard that the local savings and loan
association is currently paying 6 percent compound interest on an annual basis. If he were to
deposit his funds, what year-end equal-dollar amount (to the nearest dollar) would he be able to
withdraw annually such that he would have a zero balance after his last withdrawal 12 years
from now?
Ans : amount = 25000 , i = 6% ,n = 12 R =?
PVA(i,n)=R [(1-1/(1+i)^n )/i]

R = PVA(i,n)/ [(1-1/(1+i)^n )/i]
= 25000/ [(1-1/(1+0.06)^12)/0.06]
= 25000/8.384 = 2982
3. You need to have $50,000 at the end of 10 years. To accumulate this sum, you have decided to
save a certain amount at the end of each of the next 10 years and deposit it in the bank. The bank
pays 8 percent interest compounded annually for long-term deposits. How much will you have to
save each year (to the nearest dollar)?
Ans: 50,000 = R(FVA8%,1o) => R[(1+0.08)^10 -1)/1]
R(14.486) = 50000
R = 50000/14.486 = 3452
4. Same as problem 3 above, except that you deposit a certain amount at the beginning of each of
the next 10 years. Now, how much will you have to save each year (to the nearest dollar)?
Ans:
50,000 = R(FVAD8%,10) => R[(1+0.08)^10 -1)/1](1+0.08)
R(15.645) = 50,000
R = 50000/15.645 = 3196
5. You borrow $10,000 at 14 percent compound annual interest for four years. The loan is repayable in
four equal annual installments payable at the end of each year.
a. What is the annual payment that will completely amortize the loan over four years?
b. Prepare loan amortization schedule.
Ans:
a) Given PVA = 10000 , n= 4 ,I = 14%

PVA = R[(1-1/(1+i)^n)/i]
10000 = R[(1-1/(1+0.14)^4)/0.14]
10000 = R(0.408/0.14)
10000 = R(2.914)
R = 10000/2.914 = 3432
b)
Years Beg. Balance Installment Interest P.A Ending

Balance
1 10000 3432 10000*.014=1400 2032 10000-
2032=7968
2 7968 3432 7968*0.14 =1116 2316 7768-
2316=5652
3 5652 3432 5652*0.14 =791 2641 5652-2641 =
3011
4 3011 3432 3011*0.14 = 422 3010 3011-3010 =1
6. An investment offers $4,300 per year for 15 years, with the first payment occurring one year
from now. If the required return is 9 percent, what is the value of the investment? What would
the value be if the payments occurred for 40 years? Forever?
Ans:
When R = 4300 ,i = 9% , n = 15
PVA = R[(1-1/(1+i)^n)/i]
= 4300[(1-1/(1+0.09)^15)/0.09]
= 4300*8.06 = 34639
When n = 40
PVA = 4300[1(1-1/(1+0.09)^n)/0.09]
= 4300*10.757 = 46257
When. n = ∞
PVA = R[(1-1/(1+i)^∞/)/i]
= R[ 1-0/i] = R/i
= 4300/9% = 47778
7. Conoly Co. has identified an investment project with the following cash flows. If the discount
rate is 18 percent, what is the present value of these cash flows?
Ans:
i = 18%
CF1 =1200 ,CF2 = 730, CF3 = 965 ,CF4 = 1590
PV = CF1/(1+i) + CF2/(1+i)^2 + CF3/(1+i)^3 + CF4/(1+i) ^4
PV = 1200/(1+0.18) + 730/(1+0.18)^2+965/(1+0.18)^3+ 1590/(1+0.18)^4
= 1200/1.18 + 730/1.392 + 965/1.643+ 1590/1.939
= 1017+ 524 + 587 + 774
PV = 2902
8. An investor purchasing a British consol is entitled to receive annual payments from the British
government forever. What is the price of a consol that pays $120 annually if the next payment
occurs one year from today? The market interest rate is 5.7 percent.
Ans:
R = 120 i = 5.7% n = ∞, PV = ?
PV = 120[(1-1/(1+0.057)^∞)/0.057]
PV = 120[(1-0)/0.057]
PV = 120/ 0.057= 2105
9. An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4,
$300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn
8% annually, what is this investment’s future value?
Ans:
Given
Years 1 2 3 4 5 6
Cash 100 100 100 200 300 500
flow
i = 8% ,N = 6 , FV = ??
FV = CF1*(1+i)^N-1+ CF2*(1+i)^N-2+ CF3*(1+i)^N-3+ CF4*(1+i)^N-4+ CF5*(1+i)^N-
5+ CF6*(1+i)^N-6
FV = 100(1+0.08)^5 +100(1+0.08)^4 + 100(1+0.08)^3 +200(1+0.08)^2 +300(1+0.08)^1
+500(1+0.08)^0
FV = 100(1.469) +100(1.360)+ 100(1.259) +200(1.166) +300(1.08) +500(1)
FV = 146.9+136+125.9+233.2 +324+500 =1466
10. Suppose a business out a $5,000, five-year loan at 9 percent. The loan agreement calls for
the borrower to pay the interest on the loan balance each year and to reduce the loan balance
each year by $1,000. Because the loan amount declines by $1,000 each year, it is fully paid in
five years.
Prepare loan amortization schedule.
Ans :
Given Beginning balance = 5000 ,n =5 ,P.A = 1000 , i = 0.09%
Years Beg. Installment Interest P.A Ending.

Balance Balance
1 5000 1000 5000*9%= 450 1450 5000-
1000=4000
2 4000 1000 4000*9%=360 1360 3000
3 3000 1000 3000*9%=270 1270 2000
4 2000 1000 2000*9%= 180 1180 1000
5 1000 1000 1000*9%=90 1090 0
11. Muffin Megabucks is considering two different savings plans. The first plan would have her
deposit $500 every six months, and she would receive interest at a 7 percent annual rate,
compounded semiannually.
Under the second plan she would deposit $1,000 every year with a rate of interest of 7.5 percent,
compounded annually.
The initial deposit with Plan 1 would be made six months from now and, with Plan 2, one year
hence.
a. What is the future (terminal) value of the first plan at the end of 10 years?
b. What is the future (terminal) value of the second plan at the end of 10 years?
Ans:
R = 1000, i = 7%, n = 10
a) For first plan m = 2
FVA ?
FVA = R/m[{(1+i/m)^n*m -1}/i/m]
= 1000/2[{(1+0.07/2)^10*2 -1}/0.07/2]
= 500[{(1.035)^20-1}/0.035]
FVA = 500*28.25 = 14130
b) For second plan. m = 1
FVA = 1000[((1+0.07)^10 -1)/0.07]
= 1000*14.147
FVA = 14147
12. You want to buy a new sports coupe for $48,250, and the finance office at the dealership
has quoted you a 9.8 percent APR loan for 60 months to buy the car. What will your monthly
payments be?
Ans:
PV = 48250
i = 9.2%/12 = 0.816% , n = 60 months
R/ m =?
PVA = R/m [(1-(1/1+0.0081)^60)/0.0081]
48250 = R/m [0.383/ 0.081]
R/m. = 48250/0.73 = 102008
13. You are to make monthly deposits of $100 into a retirement account that pays 11 percent
interest compounded monthly. If your first deposit will be made one month from now, how large
will your retirement account be in 20 years?
Ans :
FVA = 100
i = 11%/12= 0.91%
n = 20 * 12 = 240
R/m = ?
FVA = R/m[{(1+0.0091)^240 -1 }/0.0091
100 = R/m[8.006/ 0.0091]
R/m = 100/ 870.21 = o.1149
End

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FEDERAL URDU UNIVERSITY OF ARTS, SCIENCE AND

Student’s MIS ID: 26189 Class Section: 3B Session: Morning

Enrollment No: Student’s Name: Qasim Jahangir warrich_______

Student’s Email: [email protected] WhatsApp No.03405860517_____

Father Name: _jahangir akhtar_______Subject : Finance_

PVA(i,n)=R [(1-1/(1+i)^n )/i]

PVA(i,n)=R [(1-1/(1+i)^n )/i]

Ans: 50,000 = R(FVA8%,1o) => R[(1+0.08)^10 -1)/1]

a) Given PVA = 10000 , n= 4 ,I = 14%

Years Beg. Balance Installment Interest P.A Ending

Years Beg. Installment Interest P.A Ending.

FVA = R/m[{(1+0.0091)^240 -1 }/0.0091

100 = R/m[8.006/ 0.0091]

R/m = 100/ 870.21 = o.1149

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