Financial Management: Concepts and Techniques

Running Head: Financial Concepts
Financial Management

Financial Concepts 1
Question 1
Part a
Year Opening Balance Interest @ 8% Yearly Deposits Closing Balance
1 $
7,000.00
$
560.00 $ 4,000.00
$
11,560.00
2 $
11,560.00
$
924.80 $ 4,000.00
$
16,484.80
3 $
16,484.80
$
1,318.78 $ 4,000.00
$
21,803.58
4 $
21,803.58
$
1,744.29 $ -
$
23,547.87
Answer:
In three years, total sum of $ 21803.58 will be available and in four years a total sum of $
23547.87 will be available.
Part b
Year Annual Cash Inflow
DCF @
15% PV of payments
1 $ 12,000.00 0.870 $ 10,434.78
2 $ 12,000.00 0.756 $ 9,073.72
3 $ 12,000.00 0.658 $ 7,890.19
4 $ 12,000.00 0.572 $ 6,861.04
5 $ 12,000.00 0.497 $ 5,966.12

Financial Concepts 2
6 $ 12,000.00 0.432 $ 5,187.93
7 $ 12,000.00 0.376 $ 4,511.24
8 $ 12,000.00 0.327 $ 3,922.82
9 $ 12,000.00 0.284 $ 3,411.15
10 $ 12,000.00 0.247 $ 2,966.22
11 $ 12,000.00 0.215 $ 2,579.32
12 $ 12,000.00 0.187 $ 2,242.89
Total NPV $ 65,047.43
The maximum amount that the investor will be willing to pay will be $ 65047.43
Part c
Yield to
Maturity= Coupon Payment + Face Value - Market Price
Terms to Maturity
(Face Value + Market Price)*0.50
= 4+(( 100-91.137)/12)
(100+91.137)*0.50
=4.74
95.57
=4.96%

Financial Concepts 3
Bond Equivalent Yield= YTM * Number of Compounding
=4.96 * 2
=9.92%
Effective Annual
Yield= =(1+ (r/n))^n)-1 (
=(1+ (0.0992/2))^2-1
=10.17%
Question 2
Part a
Project A
Year Cash Flows
DCF @
15% PV of Cash Flows Cumulative Cash Flows
0 -250 1.000 -250.00 -250.00
1 100 0.870 86.96 -163.04
2 100 0.756 75.61 -87.43
3 100 0.658 65.75 -21.68
4 100 0.572 57.18 35.50
Payback
years 3.38 years
Project B
Year Cash Flows
DCF @
15% PV of Cash Flows Cumulative Cash Flows
0
-$
250.00 1.000 -$ 250.00
-$
250.00
1
$
100.00 0.870 $ 86.96
-$
163.04
2
$
200.00 0.756 $ 151.23
-$
11.81
3
$
- 0.658 $ -
-$
11.81
4
$
- 0.572 $ -
-$
11.81