School of Management Studies Finance I (BUS219S): 2nd Semester 2007

SUGGESTED SOLUTIONS TO TUTORIAL 2

TIME VALUE OF MONEY AND DCF
Chapter 5: Solutions to Questions and Problems
1. R5 000(1,04)5 = R6 083,26; R1 083,26 – R200(5) = R83,26

2. FV = R2 250(1,17)30 = R249 895,46

FV = R9 310(1,06)15 = R 22 312,96
FV = R76 355(1,12)2 = R 95 779,71
FV = R183 796(1,09)7 = R335 986,28

3. PV = R15 451 / (1,04)2 = R 14 285,32

PV = R51 557/ (1,13)5 = R 27 983
PV = R886 073 / (1,22)15 = R 44 881,98
PV = R550 164 / (1,18)6 = R203 798

4. FV = R307 = R209(1+r)3; r = (307/209)1/3 – 1 = 13,67%

FV = R761 = R413(1+r)9; r = (761/413)1/9 – 1 = 7,03%
FV = R136 771 = R35 786(1+r)15; r = (136 771/35 786)1/15 – 1 = 9,35%
FV = R255 810 = R77 295(1+r)30; r = (255 810/77 295)1/30 – 1 = 4,07%

5. FV = R1 284 = R534(1,04)t; t = ln (1 284/534) / ln 1,04 = 22,37 yrs

FV = R4 341 = R1 908(1,09)t; t = ln (4 341/1 908) / ln 1,09 = 9,54 yrs
FV = R402 662 = R22 754(1,23)t; t = ln (402 662/22 754) / ln 1,23 = 13,88 yrs
FV = R173 439 = R86 932 (1,34)t; t = ln (173 439/86 932) / ln 1,34 = 2,36 yrs

18. FV = R20 000 [1 + (0,07/12)]540 = R462 469,38

FV = R20 000 [1 + (0,07/12)]420 = R230 123,04
Better to start early!

19. FV = R17 000 (1,06)6 = R24 114,82

20. FV = R60 000 = R40 000 (1,05)t;

1,50 = 1,05t
t = ln1,5/ln1,05 = 8,31
From now, you’ll wait 2 + 8,31 = 10,31 years

2004 value
21. Compound annual growth rate = −1
2002 value

2002 2003 2004 CAGR

Sales 953 000 1 080 000 1 200 000 12,21%
NPAT 53 000 55 300 60 480 6,82%
Net Assets 900 000 940 000 1 480 000 28,24%
Net assets have grown much faster than sales. And profits have grown at a slower rate than sales.

Chapter 6: Solutions to Questions and Problems

3. FV@7% = R500(1,07)3 + R600(1,07)2 + R700(1,07) + R800 = R2 848,46

FV@10% = R500(1,10)3 + R600(1,10)2 + R700(1,10) + R800 = R2 961,50
FV@22% = R500(1,22)3 + R600(1,22)2 + R700(1,22) + R800 = R3 454,96

4. PVA@15 yrs: PVA = R2 250[ (1 – {1/1,09}15 ) / 0, 09 ] = R18 136,55

PVA@40 yrs: PVA = R2 250[ (1 – {1/1,09}40 ) / 0, 09 ] = R24 204,06
PVA@75 yrs: PVA = R2 250[ (1 – {1/1,09}75 ) / 0, 09 ] = R24 961,01
 PVA@forever: PVA = R2 250 / 0,09 = R25 000,00

19. APR = 12(20) = 240%; EAR = [1+ (0,20)]12 – 1 = 791,61%

20. PVA = (R300 000 - 35 000) = R265 000 = RC[ (1 – [ 1 / { 1+(0,119/12) }]60 ) / (0,119/12) ];
C = R265 000 / 45,06 = R5881,40
EAR = [1+(0,119/12)]12 – 1 = 12,57%

21. PVA = R11 814,08 = R300[ (1 – {1/1,015}t ) / 0,015 ]; 1/1,052t = 1 – [ (R11 814,08)(0,015) /
(R300) ]
1,015t = 1/(0,4093) = 2,4432; t = ln 2,4432 / ln 1,015 = 60 months

22. R2(1+r) = R4; r = 4/2 – 1 = 100,00% per 5 days

APR = (365/5) X 100% = 7 300%
EAR = [1+1,00]365/5 - 1 = 9,444733 X 1023%

23. PV = R50 000 = R750 / r ; r = R750/R50 000 = 1,5% per month

Nominal return = 12(1,5) = 18% per year; Effective return = [1,015]12 – 1 = 19,56% per year

64. a. PVA = R10 000[ (1 – {1/1,11}15 ) / 0,11 ] = R71 908,70

FVA = R71 908,70 = C[ (1,1130 – 1) / 0,11 ]; C = R361,31
b. FV = R71 908,70 = PV(1,11)30 ; PV = R3 141,71
c. FV of trust fund deposit = R15 000(1,11)10 = R42 591,31
FVA = R71 908,70 – R42 591,31 = RC[ (1,1130 – 1) / 0,11 ]; C = R147,31;
Worker’s contribution = R147,31 – R100 = R47,31

65. Without fee and annual rate = 12.90%

10 000 = 200[(1 – {1/1.01075}t)/0.01075] where 0.01075 = 0.129/12
t = 73 months (rounded up)
Without fee and annual rate = 8.90%
10 000 = 200[(1 – {1/1.00742}t)/0.00742] where 0.00742 = 0.089/12
t = 63 months
With fee and annual rate = 12.90%
10 200 = 200[(1 – {1/1.01075}t)/0.01075] where 0.01075 = 0.129/12
t = 75 months
With fee and annual rate = 8.90%:
10 200 = 200[(1 – {1/1.00742}t)/0.00742] where 0.00742 = 0.089/12
t = 65 months

66. PV1@1 Jul 84 = [ $240K{ (1 – {1/1,09}17 ) / 0,09 } ] / 1,095 = $1 332 665,80

PV2@1 Jul 84 = [ $125K{ (1 – {1/1,09}10 ) / 0,09 }] / 1,0922 = $120 476,85
PV@1 Jul 84 = $875K + $650K/1,09 + $800K / 1,092 + $1 000K / 1,093 + $1 000K / 1,094
+ $300K / 1,095 + PV1 + PV2
PV@1 Jul 84 = $3 820 262 + $1 332 665,80 + $120 476,85 = $5 273 404,65
EAR = 0,09 = (1+r)2 – 1; r = (1,09)1/2 – 1 = 4,40% per 6 months
PV@1 Jan 84 = $5 273 404,65 / 1,0440 = $5 051 153,88
PVA = $5 051 153,88 = C[ (1 – {1/1,09}5 ) / 0,09 ]; C = $1 298 613,56
Mini-Case Study

Unit Trust
FV = 9 000 [1.2010-1]/0.20
= 9 000 [25.9587]
= R233 628.30

RA Option
FV = 15 000 [1.2010-1]/0.20
= 15 000 [25.9587]
= R389 380.50
As Suzie has a marginal tax rate of 40 percent, the R9 000 contribution to the Unit Trust is
equivalent to the R15 000 annual contribution to the RA fund. The RA option will result in a lump
sum payment and a monthly annuity.

Lump sum payment (tax free): 389 380.50/3 = R129 793.50

Annuity: 389 380.50 - 129 793.50 = R259 587
259 587 = I[{1-(1/1.015)120 }/0.015]
= I[55.4985]
I = 259 587/55.4985
= R4 677.37
As the actual return is equal to the required return, the present value of the annuity is R259 587.
This must be reduced by the present value of tax payable over the next 10 years. Present value of
tax payments during retirement:

Tax Charge: 4 677.37 x 12 = R56 128.44 x 30% = R16 838.53

Effective rate: (1+0.18/12)12 –1=
PV
Value of RA option on retirement date:
19.56%
= 16 838.53 [{1-(1/1.1956)10 }/0.1956]
= 16 838.53 [4.2559]
= R71 663.10

389 380.50 - 71 663.10 = R317 717.40

Conclusion

Suzie should select the RA option as it results in a value of R317 717 on retirement date as
compared to R233 628 for the Unit Trust option. The cost of each option is the same due to the tax
deductibility of RA contributions.

E&OE/DF