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Chapter:3 Financial Statement (Ross)

Chapter:3 Financial Statement (Ross)

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Published by: gmaula on Aug 09, 2010
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12/19/2013

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Assignment 6
Prepared By:
GOLAM MAULA
073124030
FIN254
Section: 16
Prepared For:
Shahzada M Imran
Lecturer
North South University
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1. Irfan Shaheb has $5000 to invest. Because he is only 25 years old, he is not concerned about the
length of the investment¶s life. What he is sensitive to is the rate of return he will earn on the
investment. With the help of his financial advisor, Irfan Shaheb has isolated 4 equally risky
investments, each providing a single amount at the end of its life, as shown in the following table.
Each require initial $5000 payment

Investment
Single
amount
Investment
life (years)
A
$ 8400
6
B
15900
15
C
7600
4
D
13000
10
a. Calculate the rate of return on each of the four investments available to Irfan Shaheb.
b. Which investment would you recommend to him, given his goal is to maximize the rate of return.

2. Mojnu has just proposed Laily. But Laily says she will only accept his proposal if he gifts her a
diamond ring. Mojnu searched and searched and finally found the best diamond ring which costs
$170,000. Mojnu¶s bank pays him 11% interest annually. Mojnu believes laily will wait for him (or
for the ring!) 10 years .How much must he invest today to get the ring in 10 years? (assume that the
price tag of the ring will remain the same)

3. Mr. Anondo borrows $200 to be repaid in 8 years with 14% annually compounded interest. The loan

may be repaid at any earlier period without any prepayment penalty.
a. What amount will be due if the loan is repaid at the end of year 1?
b. What is the repayment at the end of year 4?
c. What amount is due at the end of the eighth year?

4. Suppose, our Mojnu is working extremely hard for his future bride and expect to have $25000 at the
end of year 2. Then he plans to invest the money for 7.9% interest for six more years. How much
money will he have at the end of 8 years?

5. Mr. Hajari is planning for a robbery with his buddies that will happen at the end of two years. He
expects to rob and get $10000 at that time. Then he will be investing the illegal money at 11% until
he has $100,000. How long will he wait from now?

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Ans to the Que no: 1 (a)
Given,
PV = $5000
r =?
Formula: With compound interest we use the future value formula:
FV = PV (1 +r)t
FV/PV = (1+r)t
1+r = (FV/PV)1/t
r = (FV/PV)1/t ± 1
Investment
Single amount
FV
Investment life
(years t)
Rate of
return ( r )
A
$ 8400
6
9%
B
15900
15
8%
C
7600
4
11%
D
13000
10
10%
I will recommend to him to invest at C investment 11% rate of return. Cause it will give him at
the high rate of return.

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