UNSW Business School
FINS2615
Intermediate Business Finance
Week 1
Introduction and Financial Mathematics recap
TUTORIAL QUESTIONS
QUESTION 1
A company is considering two investment options, both with a 5-year investment horizon. The
first option offers an annual interest rate of 8.2% compounded quarterly, and the second option
offers an annual interest rate of 8% compounded monthly. Which option do you prefer?
QUESTION 2
What is the present value of $1000 paid twice a year for the next 10 years if the interest rate is
(the first $1,000 is paid in the next half year):
a) 7% per year, compounded semi-annually
b) 7% per year, compounded annually
c) 7% per year, compounded monthly
QUESTION 3 (Excel function: PV)
A company is considering a project that requires a series of equal annual payments for the next
6 years. The company will receive annual payments of $20,000 at the end of each year for 6
years. The company’s required rate of return is 8% per annum. What is the maximum amount
you will pay for this project?
a) Draw a timeline showing the cash flows
b) Solve this question manually
c) Solve the question using the PV function in Excel
QUESTION 4 (Excel function: FV)
Albert is planning to pursue a 2-year Master’s degree in 5 years and wants to save enough
money to cover tuition and living expenses. The estimated cost of tuition and living expenses
is $40,000 per year. The Albert decides to make monthly deposits of $1,200, starting at the end
of the month, into a savings account that offers an interest rate of 5% per annum, compounded
monthly. Calculate how much money Albert will have saved by the time they start university.
a) Draw a timeline showing the cash flows
b) Solve this question manually
c) Solve the question using the FV function in Excel
d) Does Albert have enough savings for his degree? What other factors may he need to
consider?
QUESTION 5 (Excel function: NPV)
A company is evaluating an investment project and needs to calculate its net present value. The
project involves an initial investment of $200,000 at Year 0. Over the next 5 years, the project
will generate the following cash inflows: $50,000 in Year 1, $60,000 in Year 2, $70,000 in
Year 3, $80,000 in Year 4, and $90,000 in Year 5. The company uses a discount rate of 10%
per annum.
a) Draw a timeline showing the cash flows
b) Solve this question manually
c) Solve the question using the NPV function in Excel
QUESTION 6 (Excel function: IRR)
An investor is considering an investment that requires an initial outlay and provides semiannual cash inflows over the next 5 years. The investment involves an initial investment of
$130,000, and semi-annual cash inflows of $15,000 every 6 months for 5 years. What is the
effective annual rate of return for this investment.
a) Draw a timeline showing the cash flows
b) Write down the equations to solve this question manually (you do not need to calculate
the answer)
c) Solve the question using the IRR function in Excel (you will need to convert the rate to
an annual rate of return)
d) Substitute your solution from part c into your equations in part b to make sure your
answer is correct
QUESTION 7
A company is evaluating an investment opportunity that involves two distinct cash flow stages.
The company will invest $50,000 today (year 0). For the next 5 years, the investment will
generate annual end-of-year cash flows that grow at a constant rate of 6% per year, starting at
$5,000 at the end of Year 1. From Year 6 onward, the cash flows will stabilize at a constant
amount equal to the cash flow received in Year 5 and will continue until Year 15 (10 years in
total). The investor requires a nominal return of 10% per annum, compounded semi-annually.
1. Draw a timeline showing the cashflows
2. Calculate the present value of all cash flows and determine whether the investment is
financially viable.