Practice Sheet

Time Value of Money

1. Mahmuduallah Riyad has borrowed 15,000 at a 14% annual rate of interest to be repaid over
3 years. The loan is amortized into three equal annual end-of-year payments. Calculate the
annual end-of-year loan payment.
2. Assume that you just won the state lottery. Your prize can be taken either in the form of
$40,000 at the end of each of the next 25 years (i.e., $1,000,000 over 25 years) or as a single
amount of $500,000 paid immediately.
a. If you expect to be able to earn 5% annually on your investments over the next 25
years, ignoring taxes and other considerations, which alternative should you take?
Why?
b. Would your decision in part a change if you could earn 7% rather than 5% on your
investments over the next 25 years? Why?
3. While Gulzar Ahmed was a student at Bangladesh University of Professionals, he borrowed
BDT1,20,000 loans at an annual interest rate of 8%. If Gulzar repays BDT15,000 per year,
how long, to the nearest year, will it take him to repay the loan?
4. Taskin Ahmed has BDT1,50,000 to invest. His investment counselor suggests
an investment that pays no stated interest but will return BDT20,000 at the end of 3 years.
i. What annual rate of return will Taskin earn with this investment?
ii. Taskin is considering another investment, of equal risk, that earns an annual
return of 8%. Which investment should he make, and why?
5. IDLC is offering you an investment policy that will pay you and your heirs BDT12,000 per
year forever. If the required return on this investment is 4.7 percent, how much will you pay
for the policy? Suppose the IDLC has told you the policy costs 275,000. At what interest
rate would this be a fair deal? 04
6. Farhan Sakib received a gift of BDT120,000 for his recent graduation and is looking for a
bank in which to deposit the funds. Premier Bank offers an account with an annual interest
rate of 3% compounded semiannually, while Lanka Bangla Finance offers an account with a
2.75% annual interest rate compounded continuously. Calculate the value of the two
accounts at the end of one year and recommend to Farhan Sakib which account he should
choose.
7. For purchasing a laptop, Avoy has taken a loan of BDT 70,000 from Rupali Bank at 9%
interest rate. Mr. Avoy is planning to repay BDT14,000 every year as an installment. How
long it will take for Mr. Avoy to repay his loan?
 Capital Budgeting

1. Sarina Hotel is evaluating two mutually exclusive projects for expanding the restaurant’s
seating capacity. The relevant cash flows are shown in the flowing table. The firm’s cost
of capital is 4%.
Project X Project Y
Initial Investment Tk 9,80,000 Tk 3,63,000
Year (t) Cash inflows
1 Tk 1,50,000 Tk 1,10,000
2 1,70,000 98,000
3 2,20,000 93,000
4 2,70,000 82,000
5 3,40,000 67,000

Requirements:
i. Calculate Payback Period, Net Present Value (NPV) and Profitability
Index for each of the projects.
ii. Assess the acceptability of each project on the basis of each capital
budgeting techniques found in part i.
2. Square Pharmaceuticals Limited has acquired land in Faridpur. The management is
planning to open the production plant after the unveiling the Padma Bridge. Currently,
they have two investment projects to consider for the production plant. The relevant cash
flows for each project are shown in the following table. The firm’s cost of capital is 14%.

Plant MR09 Plant MR12

Initial Investment BDT 1,50,00,000 BDT 1,75,00,000
Year Cash Inflows (Each Year)
1 BDT 70,00,000 BDT 70,00,000
2 65,00,000 45,00,000
3 55,00,000 35,00,000
4 60,00,000 90,00,000

Required:
i. Calculate each project’s payback period.
ii. Calculate the net present value for each project