SCHOOL OF MATHEMATICAL SCIENCES                                    Question 1   In order to develop a new product and place it in the market for sale, a company has to invest RM50,000 now and then RM20,000 for each of the next three years

SCHOOL OF MATHEMATICAL SCIENCES                               

Question 1

In order to develop a new product and place it in the market for sale, a company has to invest RM50,000 now and then RM20,000 for each of the next three years. The product is made available for sale in the fourth year. For that, a contribution of RM10,000 must be made in the fourth year. The company incurs maintenance expenses of RM3,000 in each of the next five years. The project is expected to provide an investment return of RM15,000 at the end of the fourth year, RM25,000 at the end of the fifth year, RM40,000 at the end of the sixth year, RM30,000 at the end of the seventh year, RM25,000 at the end of the eighth year, RM15,000 at the end of the ninth year and RM10,000 at the end of the tenth year. After the tenth year, the product is withdrawn from the market. 

1. Create a chart to describe the cash flows of this project
2. Find the net present value of the project

   Question 2

    

   An investment project has the following cash flows

    

   Year	Contributions Ct	Returns Rt	Net Cash Flow ct ? Rt ?Ct
   0	100,000	0	– 100,000
   1	5,000	0	– 5,000
   2	4,000	10,000	6,000
   3	2,000	10,000	8,000
   4	0	20,000	20,000
   5	0	40,000	40,000
   6	0	60,000	60,000
   7	0	80,000	80,000

    

   Calculate 

3. the net present value at 15%.
4. the internal rate of return IRR (i.e. the yield rate) on this investment.

   Question 3

    

   You are considering building a new factory. The factory will require an investment of RM100,000 immediately. It will also require an additional investment of RM15,000 at the end of Year 2 to initiate production. Finally, maintenance costs for the factory will be RM5,000 per year at the end of Years 3 through 6. The factory is expected to generate profits of RM10,000 at the end of Year 1, RM15,000 at the end of Year 2, RM20,000 at the end of Year 3, and RM30,000 at the end of Years 4 through 6. Calculate the internal rate of return on the potential factory.

   Question 4

    

   Eric deposits 15 into a fund at time 0 and an additional 15 into a same fund at time 10. The fund credits interest at an annual effective rate of interest of i. Interest is payable annually and reinvested at an annual effective rate of interest of j = 0.75i. At time 20, the accumulated amount of the reinvested interest payments is 80. Calculate i.

    

   Question 5

    

   Victor invests RM300 into a bank account at the beginning of each year for 20 years. The account pays out interest at the end of every year at an annual effective rate of interest of i. The interest is reinvested at an annual effective rate of interest of 0.5i. The yield rate on the entire investment over the 20-year period is 8% annual effective. Calculate i.

   Question 6

    

   Caren invests RM2,000 at the beginning of the year in a fund which credits interest an annual effective rate of interest of 9%. She invests each interest payment in a separate fund, accumulating at an annual effective rate of interest of 8%. The interest payments from this fund accumulate in a bank account that guarantees an annual effective rate of interest of 7%. Determine the sum of the principal and interest at the end of 10 years.

   Question 7

    

   Mary invests RM1,000 at the end of each year for 5 years at an annual effective rate of interest of 9% and reinvests the interest at an annual effective rate of interest of 9%. At the end of 5 years, her investment has a value of X. John invests RM1,000 at the beginning of each year for 5 years at an annual effective rate of interest of 10% and reinvests the interest at an annual effective rate of interest of 8%. At the end of 5 years, his investment has a value of Y. Calculate Y – X. 

   Question 8

    

   An investor pays P for an annuity which provides payments of 100 at the beginning of each month for 10 years. These payments are invested at a nominal rate of interest of 12% convertible monthly. Monthly interest payments are reinvested at a nominal rate of interest of 6% convertible monthly. The annual yield rate over the 10-year period is 8% effective. Calculate P. 

   Question 9

    

   Esther invests 100 at the end of each year for 12 years at an annual effective rate of interest of i. The interest payments are reinvested at an annual effective rate of interest of 5%. The accumulated value at the end of 12 years is 1748.40. Calculate i.

   Question 10

    

   At the beginning of the year an investment fund was established with an initial deposit of RM1,000. A new deposit of RM500 was made at the end of four months. Withdrawals of RM200 and RM100 were made at the end of six months and eight months, respectively. The amount in the fund at the end of the year is RM1,272. Find the approximate effective rate of interest earned by the fund during the year using the dollar-weighted rate of interest formula.

   Question 11

    

   An association had a fund balance of 85 on 1 Jan and 50 on 31 Dec. At the end of every month during the year, the association deposited 10 from membership fees. There were withdrawals of 5 on 28 Feb, 15 on 30 Apr, and 50 on 15 Sep, and 25 on 30 Nov. Calculate the dollar-weighted rate of interest for the year.

   Question 12

    

   On January 1, an investment account is worth RM100,000. On May 1, the account value has increased to RM112,000, and RM30,000 of new principal is deposited. On November 1, the account value has decreased to RM125,000, and RM42,000 is withdrawn. On January 1 of the following year, the account value is RM100,000. Compute the yield rate using (a) the dollar-weighted method and (b) the time-weighted method.

   Question 13

    

   Suppose that an investor makes a series of payments and withdrawals, as follows

    

   Date	Flow	Balance before	Balance after
   1 Jan 2019	0	100,000	100,000
   30 June 2019	+500,000	70,000	570,000
   31 Dec 2019	0	870,000	870,000

    

   Compute the time-weighted rate of interest.

   Question 14

    

   On 1 January, an investment account is worth 100. On 1 May, the value has increased to 120 and D is deposited. On 1 November, the value is 100 and 40 is withdrawn. On 1 January of the following year, the investment account is worth 65. The time-weighted rate of interest is 0%. Calculate the dollar-weighted rate of interest.

   Question 15

    

   On 1 January, Lucy deposits 90 into an investment account. On 1 April, when the amount in the account is equal to X, a withdrawal of W is made. No further deposits or withdrawals are made to the account for the remainder of the year. On 31 December, the amount in the account is 85. The dollarweighted rate of return over the 1-year period is 20% and the time-weighted rate of return over the 1year period is 18%. Calculate W and X.  

   Question 16

    

   You are given the following table of interest rates in %. You deposited RM100 on January 2002. Find the accumulated amount on January 2004 under the Portfolio Method and Investment Year Method.

   y	i1 y         i2y         i3y         i4y        iy+4       Portfolio Year
   1998 1999 2000 2001 2002 2003 2004 2005	7.0        6.5        6.0        5.8       5.9           2002 6.4        6.1        5.8        5.9       6.0           2003 6.2        6.0        5.9        6.0       6.2           2004  6.1        5.9        6.1        6.4       6.6           2005 6.0        6.1        6.3        6.6 6.4        6.6        6.7         6.8        7.0 7.5

    

   Question 17

    

   The following table lists the interest rate credited under an Investment Year Method of crediting interest. Brian invests RM1,000 on 1 January 2019 and will add RM500 on 1 January 2023. How much money does Brian have on 1 January 2025?

    

   y	i1 y         i2y         i3y         i4y        i5y             iy+5
   2019 2020 2021 2022 2023 2024	7.00      6.75      6.50      6.25     6.00           5.50  6.00      5.50      5.25      5.10     5.00            5.00      4.80      4.60      4.30 4.00      3.75      3.50         3.00      3.20 4.00

    

   Question 17

    

   The following table lists the interest rate credited under an Investment Year Method of crediting interest. Brian invests RM1,000 on 1 January 2019 and will add RM500 on 1 January 2023. How much money does Brian have on 1 January 2025?

    

   y	i1 y         i2y         i3y         i4y        i5y             iy+5
   2019 2020 2021 2022 2023 2024	7.00      6.75      6.50      6.25     6.00           5.50  6.00      5.50      5.25      5.10     5.00            5.00      4.80      4.60      4.30 4.00      3.75      3.50         3.00      3.20 4.00

   Question 18

    

   You are given the following chart of interest rates in %. 

    

   y	i1 y	i2y	i3y	iy+3
   2015	3.7	3.6	3.5	6.0
   2016	3.2	3.1	3.0	5.5
   2017	2.7	2.6	2.5	5.0
   2018	2.2	2.1	2.0	4.5
   2019	1.7	1.6	1.5	4.0

   
   A deposit of RM100 is made at the beginning of 2017. 
5. How much interest was credited during 2018? 
6. What is the accumulated value at the end of 2022?