SPRING 2022

INVESTMENT ANALYSIS & PORTFOLIO MANAGEMENT (FIN630)

*ASSIGNMENT # 2*

Assignment Question: Total Marks = 15

Whether investing in attractive projects, interest-bearing securities or deposits, financial

managers and investors are constantly faced with the opportunity to generate a positive return
on their funds. Therefore, the timing of money outflows and inflows has important economic
implications that financial managers clearly perceive as the time value of money. The time value
of money concept states that one rupee received today is more valuable than one rupee received
tomorrow. Among the basic views of time value is future value. Future value (FV) refers to the
value of a current asset at some future date. It is based on an assumed rate of growth over time.
Savings institutions advertise compound interest returns at a rate of x percent, or x percent
interest, compounded annually, semiannually, quarterly, monthly, weekly, daily, or even
continuously.

Suppose, Mr. A started a sole proprietor business. He wants to purchase a vehicle for use
in his business. The purchase price of vehicle at the end of each year is given in below table.

Year Purchase Price of Vehicle

2022 Rs. 600,000
2023 Rs. 680,000
2024 Rs. 740,000
2025 Rs. 750,000

He invested almost whole of his savings in his new business and therefore does not have
sufficient funds to purchase the vehicle at this time. Moreover, he does not want to borrow funds
from any other source. But, he is expecting to have some savings from his business in upcoming
years.

He has a little know how about the concept of time value of money. Therefore, he
discussed the matter with one of his friend who is working in a bank. His friend suggested him to
start depositing his savings in a bank account. He further told him that he may withdraw his funds
at the time when his funds grow up to become sufficient to purchase the vehicle. Thus, Mr. A
deposited Rs. 100,000 on 1-1-2022, and will deposit Rs. 200,000 on 1-1-2023 and Rs. 300,000 on
1-1-2024. The bank credits his account @ 10% per annum compounded annually for the first two
years and @ 9% compounded quarterly from third year onwards till the time he keeps his savings
in the account.

 Requirements:

Part 1:

Find his account balance on 31-12-2023. Are sufficient funds available to Mr. A to
purchase the vehicle on this or the next day. Also, consider the funds of 1-1-2024 in this decision?

Part 2:

Find his account balance on 31-12-2024. Are sufficient funds available to Mr. A to
purchase the vehicle at the end of Year 2024?

Part 3:

Find his account balance on 31-12-2025. Should Mr. A withdraw all of his funds on 31-12-
2025 and purchase the vehicle?

NOTE: You are required to provide complete calculations (working) in all parts
with each and every step, formula, resulting figures with proper units and to the
point interpretation if any. Unnecessary and irrelevant details won’t get any
marks nor will copy/cheated assignments.