Financial Management 1

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THE

Question 1

CIBC Bank

Amount $2000,000 x 0.90 = 1800,000

Interest = 8%

Periods = 12 x 3 = 36

Paymnets = 0.08/12 = 0.00666667

Equation

PVA = PMT 1 - 1

i i (1 + i )n

1800000 = 1 - 1

0.00666667 0.00666667 (1 + 0.00666667)36

1800000 = 1 - 1

0.00666667 0.00666667 (1.006666667)36

1800000 = 1 - 1

0.00666667 0.00666667 ( 1.270237203)

1800000 = 1 - 1

0.00666667 1.270237203

1800000 = 149.999925 - 118.0881213727431

= 31.9118

PMT = 1800000/31.9118 = $56405.46

Months	Opening Balance	Payment	Interest	Repayment of Principal	Closing Balance
		PV = PMT x PVIFAk,n		PMT - INTEREST	O/BAL - ROP
1	1800000	($56,405.46)	12000	($68,405.46)	$1,731,594.54
2	$1,731,594.54	($56,405.46)	11543.96361	($67,949.42)	$1,663,645.12
3	$1,663,645.12	($56,405.46)	11090.96747	($67,496.43)	$1,596,148.70
4	$1,596,148.70	($56,405.46)	10640.9913	($67,046.45)	$1,529,102.25
5	$1,529,102.25	($56,405.46)	10194.01498	($66,599.47)	$1,462,502.77
6	$1,462,502.77	($56,405.46)	9750.01849	($66,155.48)	$1,396,347.30
7	$1,396,347.30	($56,405.46)	9308.981981	($65,714.44)	$1,330,632.86
8	$1,330,632.86	($56,405.46)	8870.885716	($65,276.34)	$1,265,356.51
9	$1,265,356.51	($56,405.46)	8435.710092	($64,841.17)	$1,200,515.35
10	$1,200,515.35	($56,405.46)	8003.435639	($64,408.89)	$1,136,106.45
11	$1,136,106.45	($56,405.46)	7574.043016	($63,979.50)	$1,072,126.95
12	$1,072,126.95	($56,405.46)	7147.51301	($63,552.97)	$1,008,573.98
13	$1,008,573.98	($56,405.46)	6723.826538	($63,129.28)	$945,444.70
14	$945,444.70	($56,405.46)	6302.964642	($62,708.42)	$882,736.27
15	$882,736.27	($56,405.46)	5884.908493	($62,290.37)	$820,445.91
16	$820,445.91	($56,405.46)	5469.639384	($61,875.10)	$758,570.81
17	$758,570.81	($56,405.46)	5057.138736	($61,462.60)	$697,108.21
18	$697,108.21	($56,405.46)	4647.388092	($61,052.85)	$636,055.37
18	$636,055.37	($56,405.46)	4240.369119	($60,645.83)	$575,409.54
20	$575,409.54	($56,405.46)	3836.063606	($60,241.52)	$515,168.02
21	$515,168.02	($56,405.46)	3434.453463	($59,839.91)	$455,328.11
22	$455,328.11	($56,405.46)	3035.520721	($59,440.98)	$395,887.13
23	$395,887.13	($56,405.46)	2639.247531	($59,044.71)	$336,842.42
24	$336,842.42	($56,405.46)	2245.616162	($58,651.07)	$278,191.35
25	$278,191.35	($56,405.46)	1854.609002	($58,260.07)	$219,931.28
26	$219,931.28	($56,405.46)	1466.208556	($57,871.67)	$162,059.62
27	$162,059.62	($56,405.46)	1080.397447	($57,485.86)	$104,573.76
28	$104,573.76	($56,405.46)	697.1584118	($57,102.62)	$47,471.15
29	$47,471.15	($56,405.46)	316.4743035	($56,721.93)	($9,250.79)
30	($9,250.79)	($56,405.46)	-61.67191068	($56,343.79)	($65,594.57)
31	($65,594.57)	($56,405.46)	-437.2971501	($55,968.16)	($121,562.73)
32	($121,562.73)	($56,405.46)	-810.4182213	($55,595.04)	($177,157.77)
33	($177,157.77)	($56,405.46)	-1181.051819	($55,224.41)	($232,382.18)
34	($232,382.18)	($56,405.46)	-1549.214525	($54,856.24)	($287,238.42)
35	($287,238.42)	($56,405.46)	-1914.922814	($54,490.54)	($341,728.96)
36	($341,728.96)	($56,405.46)	-2278.193048	($54,127.26)	($395,856.22)

Scotia Bank

Loan Amount $2000,000

Interest = 12%

Periods = 12 x 3 = 36

Paymnets = 0.12/12 = 0.01

Equation

PVA = PMT 1 - 1

i i (1 + i )n

2000000 = 1 - 1

0.01 0.01 (1 + 0.01)36

2000000 = 1 - 1

0.01 0.01 (1.01)

2000000 = 1 - 1

0.01 0.001 ( 1.430768783591581)

2000000 = 1 - 1

0.01 0.014307687835916

2000000 = 100 - 69.89249496272495

= 30.1075

PMT = 2000000/30.1075 = $66428.62

Months	Opening Balance	Payment	Interest	Repayment of Principal	Closing Balance
		PV = PMT x PVIFAk,n		PMT - INTEREST	O/BAL - ROP
1	2000000	($66,428.62)	20000	($86,428.62)	$1,913,571.38
2	$1,913,571.38	($66,428.62)	19135.7138	($85,564.33)	$1,828,007.05
3	$1,828,007.05	($66,428.62)	18280.07047	($84,708.69)	$1,743,298.36
4	$1,743,298.36	($66,428.62)	17432.98357	($83,861.60)	$1,659,436.75
5	$1,659,436.75	($66,428.62)	16594.36754	($83,022.99)	$1,576,413.77
6	$1,576,413.77	($66,428.62)	15764.13766	($82,192.76)	$1,494,221.01
7	$1,494,221.01	($66,428.62)	14942.21009	($81,370.83)	$1,412,850.18
8	$1,412,850.18	($66,428.62)	14128.50179	($80,557.12)	$1,332,293.06
9	$1,332,293.06	($66,428.62)	13322.93058	($79,751.55)	$1,252,541.51
10	$1,252,541.51	($66,428.62)	12525.41508	($78,954.03)	$1,173,587.47
11	$1,173,587.47	($66,428.62)	11735.87473	($78,164.49)	$1,095,422.98
12	$1,095,422.98	($66,428.62)	10954.22979	($77,382.85)	$1,018,040.13
13	$1,018,040.13	($66,428.62)	10180.40129	($76,609.02)	$941,431.11
14	$941,431.11	($66,428.62)	9414.311085	($75,842.93)	$865,588.18
15	$865,588.18	($66,428.62)	8655.881778	($75,084.50)	$790,503.68
16	$790,503.68	($66,428.62)	7905.036763	($74,333.66)	$716,170.02
17	$716,170.02	($66,428.62)	7161.7002	($73,590.32)	$642,579.70
18	$642,579.70	($66,428.62)	6425.797001	($72,854.42)	$569,725.28
19	$569,725.28	($66,428.62)	5697.252835	($72,125.87)	$497,599.41
20	$497,599.41	($66,428.62)	4975.99411	($71,404.61)	$426,194.80
21	$426,194.80	($66,428.62)	4261.947973	($70,690.57)	$355,504.23
22	$355,504.23	($66,428.62)	3555.042297	($69,983.66)	$285,520.57
23	$285,520.57	($66,428.62)	2855.205678	($69,283.83)	$216,236.74
24	$216,236.74	($66,428.62)	2162.367425	($68,590.99)	$147,645.76
25	$147,645.76	($66,428.62)	1476.457554	($67,905.08)	$79,740.68
26	$79,740.68	($66,428.62)	797.4067826	($67,226.03)	$12,514.65
27	$12,514.65	($66,428.62)	125.1465185	($66,553.77)	($54,039.11)
28	($54,039.11)	($66,428.62)	-540.391143	($65,888.23)	($119,927.34)
29	($119,927.34)	($66,428.62)	-1199.273428	($65,229.35)	($185,156.69)
30	($185,156.69)	($66,428.62)	-1851.56689	($64,577.05)	($249,733.74)
31	($249,733.74)	($66,428.62)	-2497.337417	($63,931.28)	($313,665.02)
32	($313,665.02)	($66,428.62)	-3136.650239	($63,291.97)	($376,956.99)
33	($376,956.99)	($66,428.62)	-3769.569933	($62,659.05)	($439,616.04)
34	($439,616.04)	($66,428.62)	-4396.16043	($62,032.46)	($501,648.50)
35	($501,648.50)	($66,428.62)	-5016.485022	($61,412.13)	($563,060.64)
36	($563,060.64)	($66,428.62)	-5630.606368	($60,798.01)	($623,858.65)

Advice purchase using scotia Bank it is the best because you will pay less as compared to CIBC bank, which on top of the interest you will also add 200,000 to purchase the vehicle.

C. The Effective rate

EAR = (1 + inom)m -1

EAR = (1 + 0.30/12)12 – 1

EAR = (1 + 0.025)12 – 1

EAR = 1.02512 – 1

EAR = 1.344 – 1

EAR = 0.344 or 34%

D. The outstanding for two month

= 56,405.46 x 2

= 112,810.92

Interest =0.344 /12 = 2.83%

0.0283 x 112,810.92

= 3192.55

Totals =112,810.92 + 3192.55

=116003.47

Section B

QUESTION THREE

A. Payback period

Health

Year	CashFlow	Balance
0	-24,500,000	-24,500,000
1	7,000,000	17,500,000
2	5500000	12,000,000
3	8750000	3,250,000
4	6500000

Year of recovery + (balance/ the subsequent year)

=3+(3250000/6500000)

=3.5 years

Education

Year	CashFlow	Balance
0	-29,250,000	-29,250,000
1	10,500,000	18,750,000
2	7750000	11,000,000
3	10,250,000	750,000
4	12000000

Year of recovery + (balance/ the subsequent year)

=3+ (750000/12000000)

=3.0625 years

It would be best to accept the Education project because it has a shorter payback period.

B. Net Present Value

Health

Year	Cash flow	PVIF = 7	PV
0	-24.5
1	7	0.9346	6.5422
2	5.5	0.8734	4.8037
3	8.75	0.163	7.1426
4	6.5	0.7629	4.9589
	23.4474
	24.5
	-1.0526

NPV=-6.5422+4.8037+7.1426+4.9589 = 23.4474 – 24.5

= -1.0526 Not accepted

Education

Year	Cash flow	PVIF	PV
	-29.25
1	10.5	0.9174	9.6327
2	7.75	0.8417	6.5232
3	10.25	0.7722	7.9151
4	12	0.7084	8.5008
	32.5718
29.25
3.3218

NPV= 9.6327+6.5232+7.9151+8.50

= 3.31 accept

It would be best to accept the Education project because it has a positive NPV.

C. Profitability index

Health

Profitability index

PI= -23.4474/24.5 x 100

= 95.70

Education

Profitability index

PI= 32.5718/29.25 x 100

= 1.11%

D. The government should implement the project of education as it has proved worthwhile with positive net present value and profitability index. It also provides a relatively lower payback period as compared to the health project.

Question 1

A. Future value of vacation Investment

FV = PV(1+R)n

FV = 2400(1.12)2

FV = 2400(1.2544)

FV = 3010.56

Ken will not succeed the investment has little future value.

The Amount Ken need to succeed

FV=PV*(1+R)n

=30,000=PV(1.12)2

=30000=PV(1.12544)

PV=30,000/1.12544

PV= 26,656.2411

Ken need to invest =26,656.2411/24

=1110.68 per month

The amount he need to reach the goal of purchasing a car

FV=PV*(1+R)2

=250,000=PV(1.12)2

=250,000=PV1.7623

PV=250,000/1.7623

PV= 141856.71

Ken need to invest =141856.71/60

=2364.28 per month

The cash flow of investment

Year	Cash flow	PVIF	PV
0	-28371.36*12		=-28371.36
1	1000	0.9434	943.40
2	1000	0.89	890.00
3	1000	0.8396	839.60
4	2000	0.7921	1584.20
5	3000	0.7473	2241.80
6	5000	0.705	3524.80

SECTION B

Year 1 g=10% Year 2 g=10% Year 3 g=8% Year 4 g=6% DO =2.50 K = 12%

D1	D2	D3	D4
10%	10%	8%	6%
2.75	3.025	3.267	3.46302
D1= D0(1+g)	D2= D0(1+g)	D3= D0(1+g)	D4= D0(1+g)
D1= 2.50(1+0.10) D1=2.50(1.10) D1=2.75	D2= 2.75(1+0.10) D2=2.75(1.10) D2=3.025	D3= 3.025(1+0.08) D3=3.025(1.08) D3=3.267	D4= 3.267(1+0.06) D4= 3.267(1.06) D4 =3.46302

AP3 = D4

(KS – g)

AP3 = 3.46302

0.12 – 0.06

AP3 = 3.46302

0.06

AP3 = 57.72

D1	D2	D3	D4
2.75	3.025	3.267	3.46302
0.893	0.797	57.72
		60.99
		0.712
2.455	2.410	43.424	APO=48.28

B. YTM= (C+(PV-MV) ÷n) ∕(PV+MV÷2)) (1-T)100

Yield to maturity=8%

par value of the bond =$1,000

coupon rate 6% semi annual

years of maturity= 25 years

since it is a semi-annually paid bond;

divide yield maturity by 2(R/2)

divide the coupon rate by 2(C/2)

multiply the maturity by 2(r ×2)

0.04=c+(1,000-985)/50(1000+985/2) (1-T)100

0.04=(C+0.3) ÷ (992.5)

39.7= C+0.03

C=39.67

0.06÷2=0.03

3/100×1000 30

Due to risk the yield to maturity return is 12%, therefore

0.06=(C+0.3) ÷ (992.5)

59.55=C+0.3)

C=59.25

The stock trades at 49.75$ therefore it has been under valued

Version 1.0 Page 1 of 14 Issue Date:

CCCJ-OCD/Business Administration/v 1.0 Page 11 of 14

2020-April-20

2020-May-04