FIN700 Financial Management Group Assignment

This FIN700 Financial Management Group Assignment consists of 4 problems on time value of money, loan repayments and loan terms. Get solved answers for each question and score high. Submit by Week 9.

KOI
Trimester 2, 2018
FIN700 – Financial Management
ASSIGNMENT– GROUP
Due date: Submit to your Tutor by the start of your Tutorial in Week 9 – i.e.,
when held, from Monday, 10 September to Saturday, 15 September, 2018.
Keep a soft copy in case of misadventure.
Penalties for late lodgment, as per the Subject Outline, will be strictly applied.
This Assignment consists of 4 problems, each involving
calculations, and in some cases recommendations.
You are required to complete this Assignment in Groups of 2 or 3 or 4 people.
**Groups of 1 or more than 4 persons will incur a penalty of 5 marks out of 30.**
All members of the Group should come from the same Tutorial class. You may
consult and discuss the Assignment topic with others, but you must write up your
answers yourselves. Penalties for copying and plagiarism are severe.
You should follow the following typing conventions:
 Answers to be typed, in the space provided after each question
 If additional pages are required, use the blank pages at the end.
 Times New Roman font (at minimum, 12 pitch), 1.5 line spacing; and
 Left and right margins to be at least 2.5 cm from the edge of the page.
Research, Referencing and Submission
You should quote any references used at the end of each question.
Use Harvard referencing! See http://en.wikipedia.org/wiki/Harvard_referencing
As this is a calculations problem, there is no need to submit via TURNITIN.
Marking Guide
The Assignment will be scored out of 70%, with 20 marks also awarded for
quality of Recommendations and 10 for Presentation, in line with the rubric
in the Subject Outline. This mark will be converted to a score out of 30%.
Dr Mervyn Fiedler, Subject Coordinator, FIN 700. 10 August, 2018.
Do not submit this page submit from page 2 onwards, along with KOI Group
Assignment Cover Page & Marking Rubric.
T218 – FIN700 – Financial Management - Group Assignment Page 1 of 15

____________________________________________________________________
***NOTE: When submitting Assignment, please submit from this page onwards,
with a KOI Group Assignment cover page in front,
and a FIN700 Marking Rubric at the back.***
Trimester T218
FIN700
GROUP ASSIGNMENT
Students: Please complete the following before submitting for marking.
Group members
Student No. Student Name Percentage Contribution to Assignment Signature
1. ………………………………………………………………………………………………
Tutor: Please circle one name:
Dr Mervyn Fiedler; Ms Ruhina Karim; Mr Nishith Panthi;
Mr Masoud Ahmadi-Pirshahid; Mr Paul Power; Dr Gazi Hossain
Tutorial Day …………………………………………………and Time ……………………….
This Assignment consists of four questions. All questions must be answered.
Please answer all questions in the spaces provided after each question.
Two extra pages are included at the end of the Assignment, if more pages are
required, please copy (or extend) page 15.
T218 – FIN700 – Financial Management - Group Assignment Page 2 of 15

QUESTION 2 [(4 + 4) + (2 + 2 + 3 + 3) = 18 Marks]
a) This question relates to the time value of money and deferred annuities.
Ruth Bray is age 42 today and plans to retire on her 63rd birthday. With future
inflation, Ruth estimates that she will require around $1,600,000 at age 63 to ensure
that she will have a comfortable life in retirement. She is a single professional and
believes that she can contribute $3,700 at the end of each month, starting in one
month’s time and finishing on her 63rd birthday.
i) If the fund to which she contributes earns 4.8% per annum, compounded
monthly (after tax), how much will he have at age 63? Will she have achieved
her targeted sum? What is the surplus or the shortfall?
In this case, the future value of an annuity needs to be found. The relevant formula is
indicated below.
In the given case, P = $ 3,700
R = 4.8% p.a. or (4.8/12) = 0.4% per month
N = 20 years and 11 months = 20*12 + 11= 251 months
Hence, FV of annuity = 3700*(1.004251-1)/0.004 = $1,594,437.84
The target to be achieved at age 63 was $ 1,600,000 but Ruth has not managed to achieve
the target.
Shortfall in target at age 63 = $1,600,000 - $1,594,437.84 = $ 5,562.16
ii) Using the entire fund balance, Ruth then wishes to commence a monthly
pension payable by the fund starting one month after her 63rd birthday, and
ending on her 87th birthday, after which she expects that the fund will be fully
expended. If the fund continues to earn the above return of 4.8% per annum,
compounded monthly, how much monthly pension will Ruth receive, if the fund
balance reduces to zero as planned after the last pension payment on her 87th
birthday?
The value of the monthly pension needs to be determined. It is assumed that the pension
amount would be paid at the end of month. For this, the present value of annuity formula
given below ought to be used.
T218 – FIN700 – Financial Management - Group Assignment Page 3 of 15

In the given case, PV of annuity = $ 1,594,437.84
R = 4.8% p.a. or (4.8/12) = 0.4% per month
N = 23 years 11 months = 23*12 + 11 = 287 months
P = ?
Hence, 1,594,437.84 = P*(1-1.004-287)/0.004
Solving the above, we get P = $9,351.52
Therefore, the monthly pension amount received by Ruth one month after retirement
would be $ 9,351.52 at the end of month.
QUESTION 2 continued.
b) This question relates to loan repayments and loan terms.
James and Mary Hall wish to borrow $750,000 to buy a home. The loan from the
Federal Bank requires equal monthly repayments over 25 years, and carries an
interest rate of 4.5% per annum, compounded monthly. The first repayment is due
at the end of one month after the loan proceeds are received.
You are required to calculate:
i) The effective annual interest rate on the above loan (show as a percentage,
correct to 3 decimal places).
Nominal rate of interest = 4.5% p.a.
The compounding is on a monthly basis
Hence, effective interest rate = (1+ (4.5/1200))12 -1 = 4.594%
T218 – FIN700 – Financial Management - Group Assignment Page 4 of 15

ii) The amount of the monthly repayment (consisting of interest and principal
repayment components) if the same amount is to be paid every month over the
25 year period of the loan.
The relevant formula for equal monthly installment or EMI is indicated below.
EMI = [P x R x (1+R)N]/[(1+R)N-1]
In the given case, P = $750,000, R= 4.5% p.a. or (4.5/12) or 0.375% per month,
N = 25 years or 25*12 = 300 months
Hence, EMI = 750000*0.00375*(1.00375)300/(1.00375300-1) = $ 4,168.74
QUESTION 2 continued.
iii) The amount of $Y, if - instead of the above – the Federal Bank agrees that
James and Mary will repay the loan by paying the bank $3,000 per month for
the first 12 months, then $3,500 a month for the next 12 months, and after that
$Y per month for the balance of the 25 year term.
The present value of the various annuity payments should be equal to the loan amount of
$ 750,000
PV of annuity of $ 3000 per month for first 12 months = 3000*(1-1.00375-12)/0.00375 = $
35,137.64
PV of annuity of $ 3,500 per month paid during second year = [3500*(1-1.00375-
12)/0.00375] /1.0037512 = $ 39.193.38
PV of annuity of $ Y per month paid during remaining 23 years = [Y*(1-1.00375-(23*12))
/0.00375] /1.0037524 = 157Y
Thus, 35,137.64 + 39.193.38 + 157 Y = 750,000
Solving the above, we get Y = $ 4,303.63
iv) How long (in years and months) would it take to repay the loan if, alternatively,
James and Mary decide to repay $4,400 per month, with the first repayment
again being at the end of the first month after taking the loan, and continuing
until the loan was repaid. [HINT: The final repayment is likely to be less than
$4,400, and will be paid one month after the final full installment of $4,400 is
paid.)
The present value of annuity formula can be used as shown below.
T218 – FIN700 – Financial Management - Group Assignment Page 5 of 15

In the given case, PV of annuity = $ 750,000
R = 4.5% p.a. or (4.5/12) = 0.375% per month
P = $4,400
N = ?
Hence, 750000 = 4400(1-1.00375-N)/0.00375
Solving the above, we get N = 272.3446 months
Thus, the time period = 22 years 9 months
Also, the last payment would be lesser than $4,400.
T218 – FIN700 – Financial Management - Group Assignment Page 6 of 15