QUESTION 1 (25 MARKS)
(a) In order to prepare to send his child to a medical school in future, Encik Ishak wants to accumulate RM1.5 million at the end of 15 years. Assuming that his savings account will pay 4.5% compounded annually, calculate how much he would have to deposit if:
i. he wants to deposit an equal amount at the end of each year. (4 marks)
ii. he wants to deposit one large lump sum today. (3 marks)
(b) Ravindran starts a retirement fund at age 21 and plans on depositing equal annual amounts on each birthday, starting at age 21, and ending at age 60. He wishes to have RM3 million at age 60. Chong Beng starts his fund on his 30th birthday. He wants to deposit equal annual amounts on each birthday starting on his 30th birthday and ending
on his 60th birthday. Chong Beng wants to also have RM3 million at the age of 60.
If the investment funds earn 8% per annum, calculate the amounts which Ravindran and Chong Beng respectively will have to save each year to meet their goals. Justify on the difference. (7 marks)
(c) Selinna is planning to deposit RM10,000 today into a bank account. Five years from today, she expects to withdraw RM7,500. Calculate how much money will be in the account eight years from now if the account earns 5% compound interest every year. (4 marks)
(d) RM9,000 is invested for 7 years and 3 months. The investment is offered 12% compounded monthly for the first 4 years and 12% compounded quarterly for the rest of the period. Calculate the future value of this investment. (4 marks)
(e) An investment will pay RM500 in three years, RM700 in five years, and RM1,000 in nine years. Calculate the present value of this investment if the compound interest rate is 6% per year.
QUESTION 2 (25 MARKS)
(a) Salma is considering to invest in either one of the jewelry companies – Pearl Berhad or Diamond Berhad. Historical data suggests the following probability distribution for Salma’s returns from these two jewelry companies. Decide which company would give a higher expected return.
|Probability of Occurrence||Pearl Berhad||Diamond Berhad|
- The following is historical data for Security ABC and
- Calculate the expected return and standard deviation for the securities ABC and XYZ.
|Year||Return for Sec ABC||Return for Sec XYZ|
ii. Justify which of the two securities which an investor will invest in if investor is risk averse.
QUESTION 3 (25 MARKS)
Aneka Selera Sdn Bhd is considering to open a new restaurant. It would cost RM1 million to open the restaurant (Year 0). The business is expected to last for about 4 years with no salvage value. The restaurant facilities would be depreciated over the 4 years on a straight- line basis.
Net cash inflows from the investment in restaurant before deducting annual depreciation charges, starting in Year 1, are estimated as follows:
The cost of capital for Aneka Selera Sdn Bhd is 20%.
(a) Calculate the following:
(i) The payback period.
(ii) The accounting rate of return.
(iii) Internal rate of return (IRR)
(b) The supplier advises Aneka Selera Sdn Bhd to open two restaurants simultaneously in order to reduce the initial cost of investment. The total initial investment for two restaurants would be RM1.7 million, with the total annual cash inflows for both restaurants being doubled.
Calculate the new:
(i) Payback period.
(ii) Accounting rate of return.
(iii) Internal rate of return (IRR)
(c) Suggest to the company whether to open one or two restaurants simultaneously. State reasons for your answer. (4 marks)
QUESTION 4 (25 MARKS)
Jason is considering investing in building a property in order to receive rental income. He could buy the land now (year 0) for RM100,000. Construction costs of RM180,000 would be paid in year 1. The building would have ten flats and each would have an annual rental of RM5,000. Jason thinks that he could rent out flats as follows:
|Year||Number of flats rented out|
Total annual maintenance and management charges for the flats would cost RM12,000 plus 10% of the rent received. At the end of the year 4, he would sell the building. Jason has consulted two different property dealers, Alan and Bob. Alan estimates the building could be sold for RM290,000. Bob estimates it could be sold for RM315,000. Jason’s cost of capital is 10%. All cash flows are assumed to take place on the last day of the year.
- (i) Calculate the net present value (NPV) of investing in the building, using Alan’s estimation of the sale (12 marks)
- (ii) Calculate the net present value (NPV) of investing in the building, using Bob’s estimation of the sale proceeds. (3 marks)
- Calculate the sales proceeds at the end of year 4 which would result in a net present value (NPV) of Zero (3 marks)
- Advise Jason whether or not he should proceed with investing in the Justify your answer.
- State two reasons why the calculation of the payback period is a less useful investment appraisal technique than the calculation of net present value (NPV).
Get Completed Answers on Above Financial Management Questions
Answer 1: The calculation of amount that Encik Ishak need to deposit each year is:
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