FA ASSIGNMENT 3

2.

The opportunity cost of capital means that a firm willingly let’s go ROI by investing it in own project
rather than investing in the market security/instrument.

“The opportunity cost of capital depends on the proposed use of cash, not the source of financing.”
The opportunity cost is based on the potential returns the project can generate and not the source of
the invested money on the project.

9.

a.) FV= $139

PV=$125
FV=PV(1+i)^n
139=125(1+i)^1
i=11.2%
Discount factor= 1/(1+i)= 0

b) n=5
FV=PV(1+i)^n
139=125(1+i)^5
i=2.15%

30.

Let’s assume purchase price $100

Plan to pay down payment with 10% discount , cost = 100*0.9= $90

Installment Pay Plan

Downright Payment= 25% ,
Remaining amount paid over next 3 years .
Interest rate= 5%

PV= Downtime + PVo

PVo= R*[1/interest]-R*([1/interest]*[1/1+interest]^n)
PV=25+25*{[1/0.05]-([1/0.05]*[1/1+0.05]^n)}
PV=$ 93.08

Since 90 (instant payment) < 93.08 (installment pay), instant pay would be better option.

b. In this scenarios, the payment period starts at end of 4 years.

 n=4
PV= Downtime + PVo
PVo= R*[1/interest]-R*([1/interest]*[1/1+interest]^n)
PV=25+25*{[1/0.05]-([1/0.05]*[1/1+0.05]^4)}
PV=$ 88.64

Since 90 (instant payment) > 88.64 (installment pay), installment pay would be better option.

34.

a . Annuity Amount= Saving amount / (1/r)-{1/[r*(1+r)^n})

Annuity Amount= 2,00,000/ (1/0.08)-{1/[0.08*(1+0.08)^15})= $233.649.09

b.
effective rate after inflation= [(1+interest)/(1+inflation)]-1 = [(1.08)/(1.04)]-1= 0.0385 or 3.85%

Annuity Amount= 2,00,000/ (1/0.0385)-{1/[0.0385 *(1+0.0385)^15})= $177,952.49

Amount gets increased 4% rate annually.

Year 1= $177,952.49*1.04=$185,070.88
Year 2= $185,070.88*1.04= $192,472.88
Year 3= $192,472.88*1.04=$200,117.79

44.
Rule of 72

Rate=12%
Time to double=72/r =72/12=6 years

Time for doubling

FV=PV * (1+r)^n
2*PV=PV * (1+r)^n
2=(1+0.12)^n
n=6.12 years