QUESTION 2-TIME VALUE OF MONEY
Judy Dench took up the government offer on the “Special Early Retirement Programme” and received a lump sum payment of J$3.5M. After clearing her mortgage and credit card debts she has J$1.5M remaining. She saw an advertisement recently in the local newspaper where JMMB was offering three investments offer to the public as follow:
|
Investment Product |
Interest Rate |
Term |
Conditions |
|
Investment A |
16% |
5 years |
Interest is compounded annually. Principal & Interest is paid at the end of the 5 years. |
|
Investment B |
13.80% |
6 years |
Interest is compounded annually. Principal & Interest is paid at the end of the 6 years. |
|
Investment C |
11.60% |
7 years |
Interest is compounded annually. Principal & Interest is paid at the end of the 7 years. |
Question 1:
If Judy wants to invest only J$1,000,000; which one of the investment products based on calculations would you recommend her to invest in?
B. John Travolta plans to invest the following cash flows at the beginning of each year:
Year Cash Flow
2019 $30 000
2020 $40 000
2021 $60 000
2022 $90 000
2023 $20 000
How much would John accumulate at the end of 2023 if the interest rate is compounded annually at an interest rate of 9.8%?
All working out must be shown along with formulas
No use of excel is accepted
First:
| Investment product | A | B | C |
| Investment amount PV | $ 1,000,000 | $ 1,000,000 | $ 1,000,000 |
| n= | 5 | 6 | 7 |
| I/Y = | 16% | 13.80% | 11.60% |
| Future value FV | $2,100,341.66 | $2,171,968.75 | $2,156,003.01 |
Investment option B is better
Second:
| Year | 2019 | 2020 | 2021 | 2022 | 2023 |
| Investment amount PV | $ 30,000 | $ 40,000 | $ 60,000 | $ 90,000 | $ 20,000 |
| n= | 5 | 4 | 3 | 2 | 1 |
| I/Y = | 9.8% | 9.8% | 9.8% | 9.8% | 9.8% |
| Future value | $47,877.66 | $58,139.24 | $79,425.19 | $108,504.36 | $21,960.00 |
| Total of future value | $315,906.46 |
Calculator input options given to arrive at future values.
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