Assignment#01

Submitted By:
Sana Shaheen (22526)
Saher Imtiaz (21853)
Anum Zaffar (22169)
Submitted To: Dr. Najam Us Sahar
Program: MS Accounting & Finance
Subject: Cases in Financial Management
Date: February 25, 2018

Case-01: FINANCIAL PLANNING (TIME VALUE OF MONEY)

Solution:

1. The return is calculated on the compounding basis

FV = PV (1+i) n

= $55000 (1+0.06)20
FV = $176392

2. PVOA = PMT x ((1 - (1 / (1 + i)n)) / i)

75000 = PMT x ((1 - (1 / (1 + 0.09)30)) / 0.09)
PMT = $ 7300
The yearly mortgage payment of loan $75000 is obtained through by using the formula
of present value ordinary annuity.
3. Loan Amortization Schedule

Beginning Principle
Yr Payment Interest Ending Balance
Balance Amount
(Ending (52273*9%) (PMT - (Beginning Balance -
Balance of Interest) Principle Amount)
19 Year 18)

$52,273.00 $7,300.00 $4,704.57 $2,595.43 $49,677.57

$ $ $ $
20 $46,848.55
49,677.57 7,300.00 4,470.98 2,829.02
4. Calculation for Morton’s investment suggest that Morton will accumulate $176392
after 20 years is true (See Answer#1).
Accumulation Value – Cumulative cost = 176392 – 61040 → =$115352 (Amount
accepted by Studebaker)
7300*10= $73000 (Total Payment year 21 to 30), Profit = 115352 - 73000 = $42352

5. (a)
If the excess $30,000 were invested in a long term asset yielding 8% a year, $139829
would be accumulated after 20 years.
FV = PV (1+i)n

= $30000 (1+0.08)20

FV = $139829

(b)
FVOA = PMT x (((1 + i) n - 1)) / i)
= 3052 x (((1 + 0.08)20 - 1)) / 0.08)
FV = $139665
→ 139829 +139665 = $279494

6. (a) If the excess $30,000 were invested in a long term asset yielding 7% a year, $139829
would be accumulated after 20 years.
FV = PV (1+i)n

= $30000 (1+0.07)20

FV = $116090.53

(b)
FVOA = PMT x (((1 + i)n - 1)) / i)
= 3052 x (((1 + 0.07)20 - 1)) / 0.07)
FV = $125118.24
→ 116090.53 +125118.24= $241208.77
7. Studebaker should not accept the insurance premium offer by Morton because it can be
seen in Answer#4 that he will earn $42352 after 20 years. While if he makes the
investment of 30,000 and $3052 per year, in total he will accumulate the amount of
$279494 which is larger as compare to Morton’s offer returns.

8. (a) $400000 - $139829 → $260171

To accumulate $400000 in 20 years, he will have to save $5685.31 per year.

FVOA = PMT x (((1 + i)n - 1)) / i)

260171 = PMT x (((1 + 0.08)20 - 1)) / 0.08)
PMT = $5685.31

(b)

To accumulate $400000 in 20 years, he will have to save $13709.71 per year.

FVOA = PMT x (((1 + i)n - 1)) / i)

260171 = PMT x (((1 + 0.08)12 - 1)) / 0.08)
PMT = $13709.71

FV = PV (1 + i)n
FV= 13709.71( 1+ 0.08)8
FV= 25,375.71

9. No, 12 of these monthly payments would not be equal to one of the yearly payment as
per given data
Mortgage = $75000
Annual interest = 9% Total Monthly Payments/month = $7242
Yearly Payment = 7300 (See Answer#2) Monthly Payment = $603.46
Time Period = 30 years
Dividing the mortgage’s annual interest rate by 12 to convert it to a monthly rate:
9 / 12 = 0.75% → 0.0075
Multiply the number of years of the mortgage by 12 to determine the total number of
monthly payments.
 30 years * 12 = 360 monthly payments
Plug the numbers into the following formula:
[R/ (((1 + R) ^M) - 1)] x [(1 + R) ^M] x L
[0.0075/ (((1 + 0.0075) ^360) - 1)] x [(1 + 0.0075) ^360] x $750,000.
=6034.66
Add the monthly interest rate to 1 and raise the result to the power of the number of
monthly payments
[0.0075/ (14.7305- 1)] x 14.7305 x $750,000 = $603.46 → 603.46* 12 = $7242

10. Cost $ 5152 = $3052 + $2100

FV = PV (1+i) n

= $5152(1+0.07)19
FV = $18632