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About Finance Assignment: Learning finance subject can be

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Sample of Finance Assignment Illustrations and Solutions:

A company is offered a contact which has the following terms : An

immediate cash outlay of $15,000 followed by a cash inflow of $17,900 after 3 years. What
is the companys rate of return on this contract ?
Solution :
The amount of $15,000 cash outflow may be treated as a principal which the company
deposits into an account that pays an unknown rate of interest but returns a compounded
amount of $17,900 after 3 years. These values may be substituted be substituted in

= PV (1 +)


= $15,100 (1 + )

$17,900/$ 15,000

= ( 1 + )


= ( 1 + )

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In the compound value Table A 1, value closest to the value of 1.193 in the 3 years row is
found in 6% interest rate. Thus, the actual rate of interest on the contact is slightly greater
than 6%.

Question-2 :

A 4 year annuity of $3,000 per year is deposited in a bank account that

pays 9% interest compounded yearly. The annuity payments begin in year 12 from now.
What is the FV of the annuity ?
Solution :
The FV of an annuity may be calculated by using Equation 2.1 B

= Annuity Amount (,)

Where r

= 9%


and CVA(9%3)

= 4.573

Therefore, FV

= $3,000 4.573
= $13,719
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In this example, the fact that the annuity begins in year 12 and ends in year 15 is irrelevant
for calculation of the FV because the table values compound over the time period during
which annuity payments are made. Even if, in the same example, the annuity begins in year
20 rather than year 12, its FV would still be $13,719 unless the other variables are


A student is awarded a scholarship and two options are placed before him (i)

to receive $1,100 now or (ii) receive $100 p.m. at the end of each of next 12 months.
Which option be chosen if the rate of interest is 12% p.a. ?
Solution :
Option I: The amount of $1,100 receivable now is already expressed in the present money
and therefore does not require any adjustment.
Option II: There is an annuity of $ 100 for a period of next 12 month The rate of interest is
12% p.a. The position can also be expressed as an annuity of 12 periods at rate of interest
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1% On the basis of value given in Table A-4 for PVA1 % 12) which is 11.255, the present
value of the annuity is $100 11.255 = $1,125. 50
Since, the present value in option II is higher than the present value in option 1, the
student should choose the option II.
In case, the amounts receivable in future are not equal, then the procedure given in the
preceding section i.e., the PV of a future cash flow is to be adopted. Say, in the Example 2.3
the option II is to receive $500 after 4 months. $500 at the end of 8th month and $200 at
the end of the year, then the present value of the option II may be calculated with
reference to values given in Table A-3. This will be the PV of $500 (for 4 periods at 1%) +
the PV of $500 (for 8 periods at 1%) + the PV of $200 (for 12 periods at 1%). That is


= $480. 50

$500 .923 = $461.50

$200 .887 = $177.40
So, the present value in option II is $1,19,40 and therefore, the option II is still better than
the option I. It may be noted that the PV of the option II has changed from $1,125.50 to
$1,119,40 only because of change in the payment schedule.

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Find out the present value of an investment which is expected to give a

return of $2,500 p.a. indefinitely and the rate of interest is 12% p.a.
Using the Equation 2.5 A.
9 = Annual Cash flow/r
= $2,08.3.33

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