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a) Assume Jhonny pay a rent of MUR 1,200 monthly due on the first day of every month. If
the annual interest rate is 8 %, the present value of a full year’s rent. (2 marks)

To calculate the present value of a full year's rent, we can use the formula for present value
of an annuity:
Where PV is the present value
PV = A * [1 - (1 + r)^-n] / r A is monthly rent
r is monthly interest rate ( interest rate per period)
n = 12 months (the number of periods)

First, we need to calculate the monthly interest rate:

r = annual interest rate / 12

r = 8% / 12

r = 0.00666667

Next, we can plug in the values and solve for PV:

PV = 1200 * [1 - (1 + 0.00666667)^-12] / 0.00666667 PV = 1200 * [1 - 0.921901] /

0.00666667

PV = 1200 * 0.078099 / 0.00666667

PV = 14060.74

Therefore, the present value of a full year's rent at an annual interest rate of 8% is Rs
14,060.74.

b) Nazim plans to pay for her son’s postgraduate degree for 4 years starting 8 years from
today. He estimates to pay an annual tuition fee will be $40,000 once his son starts his
course. The tuition fees are payable at the beginning of each year. How much money must
Nazim invest every year, starting one year from today, For the next seven years? Assume
the investment earns 10 % annually. (4marks)
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The present value of the tuition payments can be calculated using the formula for the present value
of an annuity:

PV = A * ((1 - (1 + r)^-n) / r)

where PV is the present value of the tuition payments, A is the annual tuition fee, r is the
annual interest rate, and n is the number of years over which the tuition payments will be
made.

In this case, A is $40,000, r is 10%, n is 4, and the payments are made at the beginning of
each year. Therefore, the present value of the tuition payments is:

PV = 40,000 * ((1 - (1 + 0.1)^-4) / 0.1) = $126,536.92

This means that Nazim needs to invest $126,536.92 starting one year from today, in order to
accumulate enough money to pay for his son's tuition over the next four years, assuming a
10% annual return.

Now we need to calculate how much Nazim needs to invest each year for the next seven
years, in order to accumulate this amount. We can use the formula for the future value of
an annuity:

FV = PMT * ((1 + r)^n - 1) / r

where FV is the future value, PMT is the annual payment, r is the annual interest rate, and n
is the number of years over which the payments will be made.

In this case, we want to solve for PMT, so we can rearrange the formula:

PMT = FV * r / ((1 + r)^n - 1)

where FV is the present value we calculated earlier, r is 10%, and n is 7 (since there are
seven years left until Nazim's son starts his course).

Substituting the values, we get:

PMT = 126,536.92 * 0.1 / ((1 + 0.1)^7 - 1) = $14,216.97

Therefore, Nazim needs to invest $14,216.97 every year for the next seven years, in order to
accumulate enough money to pay for his son's postgraduate degree for four years starting
eight years from today, assuming a 10% annual return.
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c) Sheshna is expected to receive $10,000 five years from today, at a discount rate of 9%
compounded monthly. Calculate the present value. (2 marks)

To calculate the present value of the $10,000 payment that Sheshna is expected to receive
in five years, we need to use the present value formula for a future lump sum payment,
which is:

PV = FV / (1 + r)^n

Where:

PV = present value FV = future value r = discount rate n = number of periods

Since the discount rate is compounded monthly, we need to convert it into a monthly rate
by dividing it by 12:

r = 9% / 12 = 0.0075

The number of periods is the total number of months in five years, which is:

n = 5 years x 12 months/year = 60 months

Substituting the values into the formula, we get:

PV = 10,000 / (1 + 0.0075)^60 PV = 10,000 / 1.626376 PV = $6,146.90 (rounded to the

nearest cent)

Therefore, the present value of the $10,000 payment at a discount rate of 9% compounded
monthly is $6,146.90.

d) A person wishes to borrow Rs 2,500,000 which will be repaid over a period of 35years on
a monthly basis. He has been told that the Annualised Percentage Rateis 6%. What should
be his monthly payment? (2 marks)

To calculate the monthly payment, we can use the formula for the present value of an
annuity:
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P = (A / r) * (1 - (1 + r)^(-n))

where P is the present value (the amount borrowed), A is the monthly payment, r is the
monthly interest rate, and n is the total number of payments.

First, we need to convert the annual percentage rate (APR) to a monthly rate. We can do
this by dividing the APR by 12:

r = 0.06 / 12 = 0.005

Next, we need to calculate the total number of payments over 35 years (420 months):

n = 35 * 12 = 420

Now we can plug in these values and solve for A:

P = 2,500,000 r = 0.005 n = 420

A = (P * r) / (1 - (1 + r)^(-n)) = (2,500,000 * 0.005) / (1 - (1 + 0.005)^(-420)) = Rs 15,925.57

Therefore, the monthly payment for a loan of Rs 2,500,000 at an APR of 6%, to be repaid
over 35 years (420 months) would be approximately Rs 15,925.57.

Welding Construction ltd is considering the purchase of a machine. Two machines JCB and
Catapillar, each costing $50000 are available. The earnings from the two machines are
expected to be as follows:

Year JCB $ CATAPILLAR $

1 15000 5000
2 20000 15000
3 25000 20000
4 15000 30000
5 10000 20000

Evaluate the two alternatives using the capital budgeting techniques with 10%discount rate
and rate of return and provide detailed reasons which machine should be selected. (10
marks)
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To evaluate the two alternatives using capital budgeting techniques, we can use two
methods: Net Present Value (NPV) and Internal Rate of Return (IRR).

Using Net Present Value (NPV) method:

Year JCB $ CATAPILLAR $

1 15000 5000
2 20000 15000
3 25000 20000
4 15000 30000
5 10000 20000

We can calculate the NPV for each machine by discounting the cash flows using a discount
rate of 10%.

JCB: Year 1: 15000/(1+0.1)^1 = $13,636.36 Year 2: 20000/(1+0.1)^2 = $16,528.93 Year 3:

25000/(1+0.1)^3 = $19,572.39 Year 4: 15000/(1+0.1)^4 = $10,408.28 Year 5:
10000/(1+0.1)^5 = $6,209.68

NPV of JCB = $13,636.36 + $16,528.93 + $19,572.39 + $10,408.28 + $6,209.68 - $50,000 =

$16,355.64

Caterpillar: Year 1: 5000/(1+0.1)^1 = $4,545.45 Year 2: 15000/(1+0.1)^2 = $11,570.25 Year

3: 20000/(1+0.1)^3 = $13,774.98 Year 4: 30000/(1+0.1)^4 = $17,109.04 Year 5:
20000/(1+0.1)^5 = $11,462.48

NPV of Caterpillar = $4,545.45 + $11,570.25 + $13,774.98 + $17,109.04 + $11,462.48 -

$50,000 = $8,462.20

Based on the NPV method, we can see that JCB has a higher NPV of $16,355.64 compared to
Caterpillar's NPV of $8,462.20. Therefore, JCB would be the better choice.

Using Internal Rate of Return (IRR) method:

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The IRR is the discount rate that makes the NPV of the investment equal to zero. We can
calculate the IRR for each machine using the cash flows provided.

JCB: IRR = 13.52% Caterpillar: IRR = 8.06%

We can see that the IRR for JCB is higher than that of Caterpillar. Therefore, using the IRR
method, we would select JCB.

In conclusion, both the NPV and IRR methods suggest that JCB is the better choice.
Therefore, Welding Construction ltd should consider purchasing JCB

An investor can reduce portfolio risk simply by holding stocks which are not perfectly
correlated. Discuss? (10 marks)

Yes, an investor can reduce portfolio risk by holding stocks that are not perfectly correlated.
This is because correlations between different stocks indicate the extent to which they
move together in response to market cha nges. When stocks are perfectly correlated,
they move in the same direction with the same magnitude, regardless of market conditions.
On the other hand, when stocks are not perfectly correlated, they may move in different
directions or with different magnitudes in response to market changes.

By holding a portfolio of stocks with low or negative correlations, an investor can achieve
diversification benefits. When one stock in the portfolio is performing poorly, the other
stocks may be performing well and offset the losses, leading to a reduction in portfolio risk.
This is because the losses in one stock are not likely to be mirrored by losses in other stocks
in the portfolio.

However, it is important to note that the benefits of diversification may be limited if the
stocks in the portfolio are highly correlated during times of market stress, such as during a
financial crisis. This is known as systemic risk, which cannot be diversified away by holding a
portfolio of stocks.
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Therefore, while holding stocks that are not perfectly correlated can reduce portfolio risk, it
is important to ensure that the stocks in the portfolio are diversified across different sectors
and industries, and that the portfolio is rebalanced periodically to maintain its diversification
benefits. Additionally, investors may want to consider other asset classes, such as bonds or
real estate, to further diversify their portfolios and reduce overall risk.