Financial Management Study Material

FINANCIAL
MANAGEMENT
STUDENT ID:
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Question 2
a) The car would cost $ 15,000 after 4 years.
Price of car in present value terms = 15000/(1.044) = $12,822.06
Current savings that Polly has = $ 3,000
Shortfall in present value terms = $12,822.06 - $ 3,000 = $9,822.06
The above amount should be present value of the incremental savings that Polly needs to
do through annuity. The relevant formula for PV of annuity is indicated below.
In the given case, r =4% and n = 4
Hence, $9,822.06 = P*(1-1.04-4)/0.04
Solving the above, we get P = $ 2,705.88
Thus, Polly needs to make an annual saving of $ 2,705.88 to buy the car.
b) The computation of the loan amount is based on the given information.

Now, if the quarterly instalment is increased to $3,876, then the repayment time is computed
as shown below.
It is evident from the above that higher instalment amount would lead to loan being paid back
one year earlier.
(c) This is an example of annuity due as the first payment is received today. The present
value of annuity due can be estimated using the formula listed below.
In the given case, P = $80,000, r=5% and n=10
Hence, PV of lottery proceeds = 80000 + 80000*(1-1.05-9)/0.05 = $648,625.7
Thus, the present value of the cash flows received from the lottery is $648,625.7.