UNIVERSITY OF NAIROBI, SCHOOL OF BUSINESS

DEPARTMENT OF FINANCE AND ACCOUNTING

Time value of money exercise

1. If you invest Sh.20, 000 today, how much will you have in 25 years at 12 percent?

2. You will receive Sh. 20,000 five years from now. The discount rate is 8 percent. What is the value of
your investment today?

3. An investment promises to pay the indicated amounts for the period shown
Year 1 2 3 4 5
Cash Flow 5,000 6,000 3,000 2,000 1,500
Compute the Value of investment today if the appropriate rate is 10 Percent.

4. You are making the following deposits into an investment that earns annual rate of 10 percent.

Year 1 2 3 4 5
Cash Flow 5,000 6,000 3,000 2,000 1,500
What will be the value of the investment at the end of the five year period?

5. Assume you are making Sh. 5,000 deposit each year into an investment for 15 years earning an
annual rate of 10 percent. What will be the value of the investment at the end of the fifteen year
period?

6. Mr. John has been offered a special set of annuities by his insurance company, whereby he will
receive sh. 20,000 a year for 20 years.
(a) How much would he be willing to pay for the this policy , if the discount rate is 8 percent and the
annuities are paid at the end of each year
(b) How much would he be willing to pay if the discount rate is 8 percent and the annuities are paid at
the beginning of each year

7. Mr. Pesa has been offered a special set of annuities by his insurance company, whereby he will
receive sh. 20,000 a year for the next 15 years and sh. 10,000 a year for the following 25 years.
(a) How much would he be willing to pay for the this policy , if the discount rate is 8 percent and the
annuities are paid at the end of each year
(b) How much would he be willing to pay if the discount rate is 8 percent and the annuities are paid at
the beginning of each year

8. Linda will be saving Sh. 10,000 at the end of the current period into an investment vehicle that
promises an annual rate of return of 12 Percent. Thereafter, she plans to grow the annual savings at a
rate of 6 percent per annum for ten years. How much will she have at the end of the investment
period?

9. Savvy Solutions is a software company. Over the last two decades, the company has not been paying
dividends. However, the company expects to pay Sh. 1.50 dividends per share at the end of the
current year. Thereafter, Earnings and Dividends are expected to grow at an annual rate of 2 percent
per year into the foreseeable future. If common stockholders require a minimum return of 8 percent;
How much is the stock of Savvy Solutions worth today

10. An investment promises to pay Sh. 10,000 annually forever. If the appropriate discounting rate is 10
percent, what is the value of the investment today?

Financial Management (Sep-Dec, 2014 Semester) Chogii, R.

 UNIVERSITY OF NAIROBI, SCHOOL OF BUSINESS
DEPARTMENT OF FINANCE AND ACCOUNTING
11. CAT ltd is contemplating acquiring RAT Ltd. On successful acquisition, incremental cash flows will
as follows
YEAR 1-10 11-20 21-40 41-60
CASH FLOW (Sh’Millions) 3 2 1.5 0.5

If the appropriate discounting rate is 10 percent, how much should CAT Ltd pay in order to acquire
RAT Limited?

12. CAT ltd is contemplating acquiring RAT Ltd. On successful acquisition, incremental cash flows will
as follows
YEAR 1-5
CASH FLOW (Sh’Millions) 2.5

After the fifth year cash flows are expected to grow at an annual rate of 3 percent forever. If the
appropriate discounting rate is 10 percent, how much should CAT Ltd pay in order to acquire RAT
LTD.?

13. Madam Grace is celebrating her 35th birthday today and wants to start saving for her anticipated
retirement at age of 65. She wants to be able to withdraw khs. 120,000 from her savings account on
each birthday for 15 years following her retirement; the first withdrawal will be on her 66th birthday.
She is interested in investing in her local commercial bank, which offers 8% interest per year. She
wants to make equal annual payments on each birthday into account established at the local
commercial bank for her retirement fund.
a) If she starts making these deposits on her 36th birthday and continues to make deposits until she is
65, (the last deposit will be on her 65th birthday), what amount she must deposit annually to be able
to make the desired withdrawals at retirement.
b) Suppose Madam Grace has just inherited a large sum of money. Rather than making equal annual
payments, she has decided to make one lump sum payment on her 35th birthday to cover her
retirement needs. What amount does she have to deposit?
c) Suppose Madam Grace’s employer will contribute Ksh. 1,500 to the account every year as part of
the company’s profit sharing plan. In addition she expects a ksh. 25,000 distributions from family
trust fund on her 55th birthday, which she will also put into the retirement account. What amount
must she deposit annually now to be able to make the desired withdrawals at retirement?

14. Assume that your guardian plans to borrow Sh. 1.5 Million from a local commercial bank to meet
cost of education of your sibling who is travelling abroad for post-graduate studies. The annual
interest rate on the loan is 15.9 percent and the loan term is ten years with equal annual installments.
Prepare a loan amortization schedule for your guardian.

15. Your brother, James, will Join University in seven years, for his higher education. His ambition is to
pursue medicine at the University of Nairobi. The Cost of education will be Sh. 1.5 Million per year
for five years. Anticipating James’s ambitions, your parents started investing Sh. 100,000 per year
five years ago and will continue to do so each year for the next seven years. How much more will
your parents have to invest each year for the next seven years to have the necessary funds for the
education of your brother? Use 12 percent as the appropriate interest rate throughout this problem
(a) The cost assumed to come at the end of each year
(b) The cost assumed to come at the beginning of each year

Financial Management (Sep-Dec, 2014 Semester) Chogii, R.