AG910 Principles of Finance: Workshop 1 (Week beginning Oct 3rd 2022)
1. Determine the value at the end of six years if £9,000 is deposited in a bank account today at an
annual interest rate of 8%.
2. An investment today of £60,000 is expected to produce net cash flows of £20,000 at the end of
year one, £30,000 at the end of year two, £40,000 at the end of year three and £15,000 at the end
of year four. Determine the net terminal value of the investment if the interest rate (the required
rate of return) is 8%?
3. An investment of £130,000 is expected to produce a constant cash flow of £40,000 for the next
five years. Determine its net terminal value if the required rate of return is 12%.
Continue with the investment of £130,000 expected to produce a constant cash flow of £40,000
for the next five years. Evaluate the cash flows associated with the financing of the investment if
the funds required to fund the investment are borrowed from a bank at 12% and the loan is repaid,
along with the interest payments, from the investment’s net cash flows as they arise. What is the
surplus, the net terminal value of the investment, produced by the investment at the end of year
five, having paid back the loan and interest?
4. Determine the net present value of an investment of £150,000 that is expected to produce a
constant annual net cash flow of £38,500 for the next seven years, given an interest rate of 14%.
What is the investment’s net terminal value?
5. An investment in new machinery required to manufacture a new product which will cost £80,000
is expected to produce a net cash flow of £12,000 at the end of year one, and a constant annual net
cash flow of £20,000 per annum for the years two through to year seven, and a net cash flow of
£10,000 in year eight. The product will be withdrawn from the market at the end of year eight, but
it is anticipated that the machinery can be sold at the end of year nine to realise £13,000. Given a
required rate of return of 14% determine the investment’s NPV.
6. An investment of £720,000 is expected to produce a constant annual net cash flow of £190,000
for eight years. Given a required rate of return of 12.5% determine the investment’s net present
value, using an appropriate present value annuity factor.
7. A company can purchase a machine for £36,000 or hire the same machine for £9,200 per annum
for the next six years, the assumed working life of the machine, at the end of which it will have no
value. The hire charge will be paid at the end of each year from year one to year six. If the machine
is hired the company will be responsible for its maintenance and any other costs stemming from
its use. Given an interest rate of 12% should the company buy or hire the machine?
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Last modified: September 20, 2022