Question

Case# 2   

Assume that you are nearing graduation and have applied for a job with a local bank. As
part of the bank’s evaluation process, you have been asked to take an examination that
covers several financial analysis techniques. The first section of the test addresses
discounted cash flow analysis. See how you would do by answering the following
questions.

a. If Waris just got retirement. His company pension plan will pay him $2000 at the end
of each year for the next 15 years. He asks if he can receive the entire balance of his
pension account today, so that he can merge this with other investments. How much
money should his company give him today? The interest rate is 5%

b. If Ab Waris deposited $500 at the end of each year for 12 years into his savings
account. The bank charges 4% interest compounded monthly. What will the balance
be after 12 years?

b. Ghafoor & Sons wishes to borrow $10,000 for three years. A group of individuals
agrees to lend him this amount if he contracts to pay them $16,000 at the end of the
three years. What is the implicit compound annual interest rate implied by this
contract (to the nearest whole percent)?

No plagiarism

Answer 1

a. Value of Future Pension Today = Annual Pension * Present Value Annuity Factor (0.05,15)

Value of Future Pension Today = 2000 * 10.37966

Value of Future Pension Today = $20759.32

b. Effective Annual Interest Rate = (1 + Monthly Interest)^12 - 1

Effective Annual Interest Rate = (1 + 0.04/12)^12 - 1

Effective Annual Interest Rate = 4.074%

Value of Deposits at the end of year 12 = Annual Deposit * Future Value Annuity Factor(4.074%,12)

Value of Deposits at the end of year 12 = 500 * 15.0899

Value of Deposits at the end of year 12 = $7544.94

c. Future Value = Present Value * (1 + Interest)^Years

16000 = 10000 * (1 + Interest)^3

1.60 = (1 + Interest)^3

1 + Interest = 1.60^(1/3)

1 + Interest = 1.1696

Interest = 16.96%

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