HI5002 Finance for Business- Interactive Tutorial Questions for Topic 3BDiscounted Cash Flow Evaluation
Please get the questions printed or written down in your notebook to be ready
for your Interactive Tutorial Session. Formulas can be copied and pasted from
the word file in the folder: Material Tutorials/Week 5/Formulas learnt in Topic
3B
Question 1. You have approached Commonwealth Bank for a loan to buy a
house. The bank offers you a $500 000 loan, repayable in equal monthly
instalments at the end of each month for the next 30 years. Required:
a. If the interest rate on the loan is 4.5% per annum, compounded monthly,
what is your monthly repayment (to the nearest dollar)?
b. What is your weekly payment if you wish to pay weekly instalments and
the interest rate is compounding weekly?
Question 2. Your company is trying to decide which one of two projects it should
accept. Both projects have the same start-up costs. Project 1 will produce annual
cash flows of $52 000 at the end of each year for six years. Project 2 will produce
cash flows of $39 000 at the beginning of each year for eight years. The company
requires a 15% return. Required:
a. Which project should the company select and why?
b. Which project should the company select if the interest rate is 12% at the
cash flows in Project 2 is also at the end of each year?
Question 3. At the end of this month, Leslie will start saving $200 a month for
retirement through his company's superannuation plan. His employer will
contribute an additional $0.50 for every $1.00 that he saves. He is employed by
this firm for 30 more years and earns an average of 11% monthly compounding
on his retirement savings. Required:
a. How much will Leslie have in his superannuation account 30 years from
now?
b. If at the end of year 20, Leslie voluntarily puts $20 000 in his
superannuation, how much will he has in that account when he retires?
c. Leslie has a second investment and it will start to pay him $ 25,000 next
year and after that the payment will grow at 4% each year forever. How
much is the present value of Leslie’s investment payments if the required
rate of returns is 8%?
d. How much is the present value of this second investment cash flow if the
payment is the same every year and the rate of return is the same 8%?
Formulas learnt for this topic
1 − (1 + i ) − n 
PVAn = CF 
 x (1 + i )
i

