Question 1

  1. John’s boat hire business generates $200,000 per annum for the next 10 years. Given an interest rate of 10% per year, would he be willing to sell the business today for $1,800,000?
  2. While Andy was a student at Albury University, he borrowed $25,000 in student loan at an annual interest rate of 7%. If he repays $2,000 per year, calculate the period required (to the nearest year) to pay off his debt.
  3. Benjamin receives a payment of $120,000 from his grandmother’s estate. The entire amount is invested today at an interest rate of 8% per year. He expects to receive 100 equal monthly payments from the investment; the first payment is expected in one year. Find the size of the payments.

Question 2

Your parents are interested in getting advice on what is the best outcome at the end of a six-year period for investing a sum of money in the following options.

  1. Invest $6,000 as a lump sum today.
  2. Invest $1,000 at the end of each of the next five years.
  3. Invest a lump sum of $2,500 today and $800 at the end of the next five years.
  4. Invest $1,200 at the end of year one, end of year four and end of year five.

Given an interest rate of 8% per year and compounding of interest occurs at the end of each year, what is the preferred option? Justify all relevant calculations.


Question 3

BTC Limited, an Australian-based air conditioner manufacturer is evaluating two overseas locations for a proposed expansion of production facilities at one site in Canada and the other in Thailand. The likely future return from investment in each site depends to a great extent on future economic conditions. The scenarios are postulated, and the investment return from each investment is estimated under each scenario. The Returns with their estimated probabilities are shown below:

Rate of return for Canada (%) Rate of return for Thailand (%) Probability
10 25 0.5
20 15 0.3
25 25 0.2



a. Calculate the expected value and standard deviation of the investment return in each location. Discuss the relative dispersion of the returns. (5 marks)

b. Assuming correlation coefficient of -0.3 between the returns from the two locations, what would be the expected return and the standard deviation of the following investment strategies?

i. Allocating 50 per cent of available funds to the site in Canada and 50 per cent to the Thailand site.(4 marks)
ii. Allocating 75 per cent of the funds to the site in Canada and 25 per cent to the Thailand site. (4 marks)

Which of the two strategies would you recommend for BTC? Discuss your recommendation. (2 marks)

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