Finance
1. It is important that you document how you arrived at your answer, particularly detailing calculator key strokes used for your calculations. For some problems it is beneficial to draw a time line to identify the amount and timing of cash flows.
2. Most of the marks for each question will be given for the process used to arrive at your answer. Therefore, if you just provide an answer that is wrong and there are no supporting details as to how you arrived at that answer, you won’t get any marks. But if you have detailed your process (which may have been correct but you made some error with your calculations) then you have the opportunity to get some marks for the question.
3. Ignore inflation in your answers and where possible interest rates should be calculated as percentages to 4 decimal places (e.g. 1.2678%).
Question 5 (10 marks)
John has the opportunity to invest in a scheme which will pay $5,000 at the end of the next 5 years that is, $5,000 will be paid at the end of each year for the next 5 years.. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 4%p.a.? Draw an appropriate timeline to demonstrate your calculations.
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Question 6 (18 marks)
In 1965 Rebecca’s grandparents moved from Victoria to South Australia with cash savings of $10,000. This money could have been used at that time to buy a house or invested in a long-term savings account that compounds interest daily at an effective rate of 6% p.a. By the end of 2014 (18,000 days later) the house was valued at $200,000.
(a) At the end of 2014 which investment (buy house or savings account) would have been better?
(b) What was the effective annual rate of growth in the land value?
(c) How much would have needed to be invested in the savings account in 1965 to produce the same value as the house at the end of 2014?
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Question 7 (28 marks)
Rob Morris commences employment with Allied Financial Planners at the beginning of April this year. He is to be paid on a fixed retainer plus variable commission basis. The retainer is $1,350 per month and is paid irrespective of the number of financial plans he completes. If Rob is successful in attracting new business from his parent’s friends he can expect to earn commissions of $2,500 per month for the busy months of July to November and $1,200 per month for the other months of the year. All retainer and commission payments are made at the end of the relevant month.
Rob is worried that he won’t be able to cope with the fluctuating monthly pay cheques throughout the year. Accordingly, he has approached the senior partner of Allied and asked to be paid in 26 equal fortnightly installments that are financially equivalent to his expected retainer and commission income over 12 months.
The interest rate that Allied pays is j4 = 10% p.a.
(a) Draw a time-line detailing Rob’s anticipated earnings for his first 12 months with Allied.
(b) How much should Allied offer to pay Rob each fortnight for the first 12 months of his employment?
(c) Assume that Rob and Allied have reached agreement on the fortnightly payments as calculated in (b). However, Allied’s senior partner has stated that if Rob’s actual commissions amount to less than expected, Rob will be required to pay the difference to Allied in a financially equivalent lump sum at the end of each 12 months employment period.
If Rob is paid the amount calculated in (b) above, but his sales over the first year justify a commission amount of $500 per month less than expected, how much will Rob be required to pay Allied at the end of his first 12 months?