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principal. True
Simple interest is interest earned on only the principal amount during each interest period.
3.
True
Economic equivalence exists when two cash flows could be traded for one another because
4.
5.
6.
7.
8.
9.
interest. True
If loan is to be repaid in equal periodic amount (e.g.monthly) it is said to be an amortized
loan. True
10. In a typical amortized loan, the amount of interest owed for a specified period is calculated
on the basis of the remaining balance on the loan at the beginning of the period. True
ANSWERS-SECTION A
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Find the equivalent value of the savings at year 5 (F) with interest at 5% per year.
Page 1 of 7
F=?
-5
-4
RM600
-3
-2
-1
RM300
RM400
ANSWERS
F=600(F/P,5%,10) + 300 (F/P,5%,8) + 400(F/P,5%,5) [3 marks]
F=600(1.6289) + 300(1.4775) + 400(1.2763) = RM1931.11 [1 mark]
QUESTION 2 [5 marks] Chapter 4
Keith manufacturing, a glue producing company borrowed RM120, 000 at a simple interest of
10% per year for six years to expand its facilities.
How much simple interest would be repaid as a lump - sum amount at the end of year 6 when
half of the loan principal is repaid at the end of year 3 and the other half will be repaid in one
lump sum amount at the end of year 6? (Hint: Re calculate the interest at year 4 to year 6)
ANSWERS
YEAR
1
2
3
4
5
6
AMOUNT OWED
AT BEGINNING
OF YEAR-RM
120,000
120,000
120,000
60,000
60,000
60,000
INTEREST
ACCRUED FOR
YEAR- RM
12,000
12,000
12,000
6,000
6,000
6,000
TOTAL AMOUNT
OWED AT END
OF YEAR-RM
132,000
132,000
132,000
66,000
66,000
66,000
PRINCIPAL
PAYMENTRM
0
0
60,000
0
0
60,000
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
10
What is the minimum price per pair the company should charge?
[3 marks]
[3 marks]
160-60= 100, RM100 [2 m]; RM100 to absorb fixed costs and profits
(c)
StayHealthy Sales Department has established a sales goal of 12000 pairs of shoes. If
they achieve their sales goal, what is their total profit?
[3 marks]
TR TC = Profit
TC = 600,000 + 60(12,000) = RM1,320,000
TR = 160(12,000)= RM1,920,000
Page 4 of 7
Label the fixed cost , the breakeven quantity and the profit at 12,000 pairs of shoes on the
cost- volume -profit graph below.
[3 marks]
Cost-Volume-Profit Breakeven Graph
1,920,000.00
1,320,000.00
REVENUE AND EXPENSES (RM)
0.00
QUANTITY
1,920,000.00
1,500,000.00
Revenues Sales
and Expenses
Revenue
1,000,000.00
Cost of Sales
Fixed Expenses
1,320,000.00
960,000.00
500,000.00 600,000.00
0.00 0.00
0
6000
12000
Breakeven
(e)
What is the effect on profit at 12,000 pairs of shoes if the fixed costs increases by
RM170,000 and variable costs reduce by RM10? Calculate to answer. [3 marks]
FC = 600,000 + 170,000 = RM770,000; VC per unit = 60 10 = RM50 per unit
Profit = TR FC VC
160(12,000) -770,000 - 50(12,000) = RM550,000
RM600,000 RM550,000 = RM50,000
Profit decline by RM50,000.
Page 5 of 7
P=20,000
b)
A certain machine has an investment cost of RM150, 000, a life of 10 years and no resale
value. Annual costs of materials, maintenance and electric power for the machine are
expected to total RM20,000. A major servicing of the machine will occur once in year 5
at a cost of RM30,000. If the interest rate is 15% per year, what is the lump-sum cost
of this machine at the present time?
[5 marks]
150,000 + 20,000(P/A,15%,10) + 30,000(P/F,15%,5)
150,000 + 20,000(5.0188) + 30,000(0.4972) = RM265,292
c)
You are considering whether to invest in an asset. The investment will cost you RM3,500
now. The expected annual rental income of the asset for 6 years is as in the table below.
At an interest rate of 9%, should you invest in this asset?
[5 marks]
YEAR
1
2
3
4
5
6
800(P/A,9%,3) -100(P/G,9%,3)+750(P/A,9%,3)(P/F,9%,3)
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