Chapter Four: Financial Mathematics

Questions

4.3 Rigo sells some land which is no longer integral to his business’s expansion
plans. The sale price is $220 000; the transaction costs are $6000; the land
cost $100 000 and Rigo’s capital gain is $114 000. Which of these values are
cash flows?

4.5 Sunni borrows $2000 from his mate Greg for one year at 5% p.a.
compounding annually. Is the interest payable more or less (or the same)
as 5% simple interest?

4.10 Jill has $1000 saved and can invest it at 5% p.a. simple interest or
compounding monthly? Which deal will give her more funds at the end of
12 months?

4.16 Assume you have been given a monthly annuity due that is deferred for six
months. How many months must elapse before you receive the first
payment?

Financial Problems

4.9 Don Ltd bought a $100 000 commercial bill in the secondary market with 100

days to maturity. It was discounted at 8%. How much did the company
pay?
4.13 Jean invested her lottery prize of $80 000 in a fund that pays 6% pa. How
much will she have at the end of 8 years?

4.16 Agrico has contracted an interest-only loan. It must repay the principal of
$500 000 in 6 years’ time. How much must it invest at the end of the year to
have exactly $500 000 put aside if funds earn 6%?

4.17 If Sootico borrowed $500 000 now at 6% compounding monthly, how much
must it repay monthly to pay off the loan in 6 years?

4.19 Sam Lee is saving for his retirement. He invests a regular $1000 per month
for 20 years and earns 8% p.a. on his investment. How much does he have
on his retirement?

4.24 Sam is negotiating to purchase an annuity of $50 000 p.a. for 10 years.
Funds currently earn 6% p.a. To sweeten the deal, the supplier offers (a) to
make it an annuity due (with 10 payments in total) or (b) to add an extra
payment of $10 000 to be paid immediately. Which is the better deal for
Sam, if the price remains the same?

© John Wiley and Sons Australia, Ltd 2008 4.1

 Chapter Four: Financial Mathematics

© John Wiley and Sons Australia, Ltd 2008 4.2