Business Finance Final Assessment Trimester 2, 2021

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HC2091
BUSINESS FINANCE
FINAL ASSESSMENT TRIMESTER 2, 2021
Assessment Weight: 50 total marks
Instructions:
 All questions must be answered by using the answer boxes provided in this paper.
 Completed answers must be submitted to Blackboard by the published due date
and time.
Submission instructions are at the end of this paper.
Purpose:
This assessment consists of six (6) questions and is designed to assess your level of
knowledge of the key topics covered in this unit
HC2091 Final Assessment T2 2021

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Note: References are not required for this assessment
QUESTION 1 (7 marks)
Jenny decided to do the following things after completion of her finance degree at
Holmes Institute:
(i) Putting an exact amount of money in to Smart Investment Fund at the beginning of
each year to have a saving of $800,000 for her retirement in 25 years from now. The
average rate of return provided by this investment fund is 11% per year.
(ii) Having solar panels installed on her house roof for saving monthly electricity
expense.
(iii) Saving extra monthly income in to a bank account that allows flexibility when she
needs cash and at the same time provides interest income for any existing balance.
Required:
a. How much money should Jenny put into her investment fund account at the
begining of each year to reach her saving target in 25 years from now? (3 marks)
b. The solar panel provider offers her a payment package of $100/month at the end
of each month for 3 years. Given the interest rate is 3.5%, calculate the present
value of the payment package? (2 marks)
c. Jenny is considering offers from two banks for her saving account. Bank A offers
the interest rate of 2.54% per year, compounding semi-annualy. Bank B offers the
interest rate of 2.53% per year, compounding daily. Help Jenny choose the better
Bank by calculating Effective Annual Interest Rate (EAR). (2 marks)
ANSWER:
a) Average rate of return = 11%
Investment = (8000000/11%) *25 = $7272727.27
b) Present Value of 3 years = (1//1.035)3 = 0.87, present value of payment package =
0.87*100*12*3 = $3132
c) Effective annual Interest Rate (EAR) of Bank A = (1 + i/n)n - 1 =
(1+ 2.54/2)2 - 1 = 5.1529 - 1 = 4.1529%
Effective annual Interest Rate (EAR) of Bank B = (1 + i/n)n - 1
=(1+ 2.53/365)365 - 1 = 12.44 - 1 = 11.44%
Jeeny will choose Bank B as she is getting 11.44% of interest on her savings
which is more than Bank A.
HC2091 Final Assessment T2 2021

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QUESTION 2 ( 11 marks)
Five years ago Peter had started his saving for his children’s higher education by putting a lump
sum of $25,000 into an investment instrument on the securities market. The investment has
been paying a rate of returns of 12.3% per year, compounding monthly.
Required:
a. Calculate how much money has Peter accumulated from his investment now? (3 marks)
b. If Peter’s initial investment was $30,000 and he had obtained the same investment outcome
after five years, how much should have been the actual rate of return, assuming
compounding annually for his investment ? (4 marks)
c. If Peter would like to have totally $60,000 for his children’s higher education and moves all
the saving accumulated from current investment after five year to another instrument that
pays the interest rate of 13.5% per year, compounding annually. How long will it take for
Peter to reach his target of $60,000 ? (4 marks)
ANSWER:
a. Principal = $25000, r = 12.3%, t = 5 years, n = 12
Amount = P*{(1 + r/n)}t = 25000* {(1 + 0.123/12)}12*5
= 25000* (0.01025)60= $46096.88
b. Rate of Return = n* [(A/P)1/nt - 1] = 1 * [ 46096.88/ 30000]1/1*5 = 0.0897 Rate
of Return = 8.871%
c. P = $46096.88, R = 13.5% per year, A = $60000
Time (t) = 2.082 years, which is approximately 2 years 1 month.
HC2091 Final Assessment T2 2021