Part A

Assume you want to borrow $6,000 for a period of four years. You have two choices. ANZ bank is offering to lend you the amount at 7.25% p.a.. You can also borrow from Westpac bank and will have to repay a total of $8,162.93 at the end of four years. Which bank should you go with, and what is the interest rate if you borrow from Westpac bank?


Part B

Wilson Ltd has borrowed from a bank to invest in a project. The loan requires a payment of $20,000 every year for five years. The lender quoted Wilson Ltd a rate of 8.50% p.a.. How much did the bank lend to Wilson Ltd?


Part C

Sarah is evaluating whether she should take over a retail business. The current owner had originally signed a 25-year lease, of which 15 years still remain. The restaurant has been growing steadily at a 5 per cent growth for the last several years. Sarah expects the business to continue to grow at the same rate for the remaining lease term. At the end of last year, the business had a net cash flows of $310,000. What is the present value of this investment if the discount rate is 15%?


Part D

You have $10,000 to invest for the next 40 years for your retirement. You are offered an investment plan that will pay you 5% per year for the next 20 years and 10% for the last 20 years. How much will you end up with in 40 years’ time? Does it matter if the investment plan pay you 10% for the first 20 years and 5% for the next 20 years? Why or why not?

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