CARBS-CHAUDHARY ABDUL REHMAN BUSINESS SCHOOL THE SUPERIOR UNIVERSITY, LAHORE ASSIGNMENT-1 MBA (2.5) SUBJECT: MANAGERIAL FINANCE COURSE CODE: TIME ALLO WED: MAX. MARKS: TERM: SPRING 2023 DATED: STUDENT ID. ______________ NAME: __________________________ Time Value of Money (TVM) Question # 01 The following are exercises in future values: a. At the end of three years, how much is an initial deposit of $100 worth, assuming a compound annual interest rate of 10 percent? b. At the end of five years, how much is an initial $500 deposit followed by five year -end, annual $100 payments worth, assuming a compound annual interest rate of 10 percent? c. At the end of six years, how much is an initial $500 deposit followed by five year-end, annual $100 payments worth, assuming a compound annual interest rate of 10 percent? d. At the end of three years, how much is an initial $100 deposit worth, assuming a quarterly compounded annual interest rate of 10 percent? Question # 02 Muffin Megabucks is considering two different savings plans. The first plan would have her deposit $500 every six months, and she would receive interest at a 7 percent annual rate, compounded semiannually. Under the second plan she would deposit $1,000 every year with a rate of interest of 7.5 percent, compounded annually. The initial deposit with Plan 1 would be made six months from now and, with Plan 2, one year hence. a. What is the future (terminal) value of the first plan at the end of 10 years? b. What is the future (terminal) value of the second plan at the end of 10 years? Question # 03 A Dillonvale, Ohio, man saved pennies for 65 years. When he finally decided to cash them in, he had roughly 8 million of them (or $80,000 worth), filling 40 trash cans. On average, the man saved $1,230 worth of pennies a year. If he had deposited the pennies saved each year, at each year’s end, into a savings account earning 5 percent compound annual interest, how much would he have had in this account after 65 years of saving? How much more “cents” (sense) would this have meant for our “penny saver” compared with simply putting his pennies into trash cans? Question # 04 Joe Hernandez has inherited $25,000 and wishes to purchase an annuity that will provide him with a steady income over the next 12 years. He has heard that the local savings and loan association is currently paying 6 percent compound interest on an annual basis. If he were to deposit his funds, what year-end equal-dollar amount (to the nearest dollar) would he be able to withdraw annually such that he would have a zero balance after his last withdrawal 12 years from now? Question # 05 Lost Dutchman Mines, Inc., is considering investing in Peru. It makes a bid to the government to participate in the development of a mine, the profits of which will be realized at the end of five years. The mine is expected to produce $5 million in cash to Lost Dutchman Mines at that time. Other than the bid at the outset, no other cash flows will occur, as the government will reimburse the company for all costs. If Lost Dutchman requires a nominal annual return of 20 percent, what is the maximum bid it should make for the participation right if interest is compounded (a) annually? (b) semiannually? (c) quarterly?
