Question 1.  National First Bank offers you a home loan for the next 30 years. The interest rate on the loan is 2.5% per annum. Required:

  1. If the bank says that you need to pay $500 each week and the interest rate is compounded weekly, what is the amount of your home loan?
  2. What is your monthly payment if you wish to pay monthly instalments and the interest rate is compounding monthly?

 

Question 2. Giant Equipment Ltd. is considering two projects to invest next year. Both projects have the same start-up costs. Project A will produce annual cash flow of $42 000 at the beginning of each year for eight years. Project B will produce cash flow of $48 000 at the end of each year for seven years. The company requires a 12% return. Required:

 

  1. Which project should the company select and why?
  2. Which project should the company select if the interest rate is 14% and the cash flow in Project B is also at the beginning of each year?

 

Question 3. Anne has a new job and her employer will pay her $200 a month for superannuation plan. Now Anne is 25 years old and she plans to retire when she is 65 years old. The superannuation plan earns an average of 9% monthly compounding. Required:

  1. How much will Anne have in her superannuation account when she retires?
  2. If Anne voluntarily puts $15 000 in her superannuation when she is 50 years old, how much will she have in that account when she retires?
  3. Anne has a second investment and it will start to pay her $ 12,000 every year forever. How much is the present value of this second investment cash flow if the rate of return is 7%?
  4. If the payment from Anne’s second investment will start at $12,000 then grow at 5% each year forever, how much is the present value of the investment payments, assuming the same rate of return 7% applies?
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