Assignment 6

Prepared By:
GOLAM MAULA 073124030 FIN254 Section: 16

Prepared For:
Shahzada M Imran Lecturer

North South University

FIN254 Assignment#3 (Based on Chapter 5)
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 A B C D Single amount $ 8400 15900 7600 13000 Investment life (years) 6 15 4 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?

Due Date: 20th June, 2010 (Sunday)

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 A B C D

Single amount FV $ 8400 15900 7600 13000

Investment life (years t) 6 15 4 10

Rate of return ( r ) 9% 8% 11% 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.

Ans to the Que no: 1 (b) Given, FV= $170,000 r =11% or 0.11 t = 10 years PV =?

To find the PV of a lump sum, we use: PV = FV / (1 +r) t PV = $170,000 / (1.11)10 = $59,871.36

Ans to the Que no: 3 Given, PV = $200 r = 14% or .14 we will use formula : FV = PV (1 +r) t (a) Here, t=1 FV = 228 (b) Here, t =4 FV=337.79 (c) Here, t=8 FV= 570.52

Ans to the Que no: 4

Given, PV=$25,000 t = 6 years (the money will only be invested for six years, so the number of periods is six) r = 7.9% or .079 FV =? We need to find the FV of a lump sum. FV = PV (1 +r) t FV = $25,000(1.079)6 = $35,451.97

Ans to the Que no:: 5

We will use the FV formula, that is: FV = PV (1 +r) t Solving fort, we get: FV/PV = (1+r) t ln FV/PV = ln ( 1+r)t t = ln (FV / PV) / ln (1 + r) t = ln ($100,000 / $10,000) / ln (1.11) = 22.06 So, the money must be invested for 22.06 years. However, he will not receive the money for another two years. From now, He¶ll wait: 2 years + 22.06 years = 24.06 years

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