hi Here are some questions that I have attempted. My workings are below.Are they correct
Much appreciated
Question 1
The Browns, both graduates and are excited over the birth of Violet, their first
child. They value highly their own educational experiences and are determined that
Violet will be given similar opportunities. They decide to invest a set amount each year
commencing one year from now to put towards funding her possible university studies.
They plan to make 18 such annual deposits which will lead right up to when she is most
likely to go to university. They have decided to invest in a managed fund which
anticipates a 13.5% annual growth on such investments. Inflation over this period can be
expected to be 4%.
a) determine the size of each annual deposit if the Browns decided they wanted to have
$200,000 available upon making the final deposit.
They decide to invest $2,000 each year.
b) determine the amount expected to be available to the Browns once their final deposit
is made.
Residential Colleges at their closest university are offering students commencing there
today a package deal if they pay on commencement for meals and accommodation for
the three years duration of their anticipated stay. The package costs $24,000 and is
expected to rise in line with inflation.
c) based on your answer to b) above, can the Browns expect to be able to take up such a
package for Violet in 18 years time?
Question 2
You have established an agribusiness firm in a small town and now have the opportunity
to expand into adjoining premises. You expect the expansion will require renovations
costing you $15,000 initially but thereafter would boost net profit each year by $18,000
at current values. Inflation is 3%.
a) if you feel you need to make a real 8% each year return on such an investment, what
is the maximum amount you should consider paying the current owner for the property?
You negotiate to buy the adjoining premises for $170,000 and will finance the purchase
and the renovations needed by a mixture of savings and loan funding. The loan is
available at 11.8% and your savings contributions will come from cashing in a policy
into which you have deposited $9,000 each year for the past five years (you have just
made the fifth deposit). The policy has been earning 6%.
b) how much will your cashed up policy provide?
c) what will be the annual repayments on the loan if it is taken over 8 years?
d) what is the weighted average interest rate applying to the purchase and renovation of
the adjoining premises?
My calculations thus far
1a: 200000/(1.095)^18 = $39045.93
$39045.93/ (1-(1.095)^-18 = $4609.22
0.095
Answer $4609.22 annual deposit
b: Nominal rate of 13.5% ???
$2000 * (1-(1.135)^-18 = $13298.40
0.1135
$13298.40* (1.135)^18= $129933.34
Answer $129933.34
c: Investing $2000 per year for 18 years yields a total of $129933.34. The cost of package is $24000 therefore the Browns can expect to take up such a package
Q2 a: $15000/ 8% = $187500
Answer $187500
b: $9000(1-(1.06)^-5 = $37911.27
0.06
$37911.27 * (1.06)^5 = $50733.83
Answer $50733.83
c: $170000+ $15000 - $50733.83 = $134266.17
$134266.17/(1-(1.118)^-8 = $26853.24
0.118
Answer $26853.24
d: $50733.83/$185000 * 0.06 = 1.64%
$134266.17/$185000 * 0.118 = 8.56%
Answer 1.64%+ 8.56% = 10.2%
Much appreciated
Question 1
The Browns, both graduates and are excited over the birth of Violet, their first
child. They value highly their own educational experiences and are determined that
Violet will be given similar opportunities. They decide to invest a set amount each year
commencing one year from now to put towards funding her possible university studies.
They plan to make 18 such annual deposits which will lead right up to when she is most
likely to go to university. They have decided to invest in a managed fund which
anticipates a 13.5% annual growth on such investments. Inflation over this period can be
expected to be 4%.
a) determine the size of each annual deposit if the Browns decided they wanted to have
$200,000 available upon making the final deposit.
They decide to invest $2,000 each year.
b) determine the amount expected to be available to the Browns once their final deposit
is made.
Residential Colleges at their closest university are offering students commencing there
today a package deal if they pay on commencement for meals and accommodation for
the three years duration of their anticipated stay. The package costs $24,000 and is
expected to rise in line with inflation.
c) based on your answer to b) above, can the Browns expect to be able to take up such a
package for Violet in 18 years time?
Question 2
You have established an agribusiness firm in a small town and now have the opportunity
to expand into adjoining premises. You expect the expansion will require renovations
costing you $15,000 initially but thereafter would boost net profit each year by $18,000
at current values. Inflation is 3%.
a) if you feel you need to make a real 8% each year return on such an investment, what
is the maximum amount you should consider paying the current owner for the property?
You negotiate to buy the adjoining premises for $170,000 and will finance the purchase
and the renovations needed by a mixture of savings and loan funding. The loan is
available at 11.8% and your savings contributions will come from cashing in a policy
into which you have deposited $9,000 each year for the past five years (you have just
made the fifth deposit). The policy has been earning 6%.
b) how much will your cashed up policy provide?
c) what will be the annual repayments on the loan if it is taken over 8 years?
d) what is the weighted average interest rate applying to the purchase and renovation of
the adjoining premises?
My calculations thus far
1a: 200000/(1.095)^18 = $39045.93
$39045.93/ (1-(1.095)^-18 = $4609.22
0.095
Answer $4609.22 annual deposit
b: Nominal rate of 13.5% ???
$2000 * (1-(1.135)^-18 = $13298.40
0.1135
$13298.40* (1.135)^18= $129933.34
Answer $129933.34
c: Investing $2000 per year for 18 years yields a total of $129933.34. The cost of package is $24000 therefore the Browns can expect to take up such a package
Q2 a: $15000/ 8% = $187500
Answer $187500
b: $9000(1-(1.06)^-5 = $37911.27
0.06
$37911.27 * (1.06)^5 = $50733.83
Answer $50733.83
c: $170000+ $15000 - $50733.83 = $134266.17
$134266.17/(1-(1.118)^-8 = $26853.24
0.118
Answer $26853.24
d: $50733.83/$185000 * 0.06 = 1.64%
$134266.17/$185000 * 0.118 = 8.56%
Answer 1.64%+ 8.56% = 10.2%