GetSmarter Finance Module 6 Assignment: Present Value and Repayments

This finance assignment, completed by a student, addresses key concepts in financial calculations and planning. The assignment covers three main questions: the first focuses on present value and opportunity cost, requiring students to calculate present values of cash flows, determine opportunity costs, and make investment recommendations. The second question delves into retirement savings, exploring calculations for required savings, lump sum investments, annuity payouts, and the impact of inflation. Finally, the third question examines loan repayments, including the definition of the prime rate, risk assessment, balloon payments, and monthly repayment calculations for a vehicle loan, considering deposit impacts. The assignment requires the use of financial tables and demonstrates the application of financial principles in practical scenarios.

MODULE 6
Assignment 6
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Name:
1. Instructions and guidelines (Read carefully)
Instructions
1. Insert your name and surname in the space provided above, as well as in the file name.
Save the file as: First name Surname Assignment 6 – e.g. Lilly Smith Assignment 6. NB!
Please ensure that you use the name that appears in your student profile on the Online
Campus (OLC).
2 Write all your answers in this document. There is an instruction that says, “Start writing
here” under each question. Please type your answer there.
3 Submit your assignment in Microsoft Word only. No other file types will be accepted.
4 Do not delete the plagiarism declaration or the assignment instructions and
guidelines. They must remain on your assignment when you submit.
PLEASE NOTE: Plagiarism cases will be penalised according to the Head tutor’s and
GetSmarter's discretion.
IMPORTANT NOTICE: Please ensure that you have checked your course calendar for the due
date for this assignment. This calendar is available on the OLC and has also been sent to you
by your Course Coach.
Guidelines
1 There are six pages and three questions in this assignment.
2 Make sure that you have carefully read and fully understood the questions before
answering them. Answer the questions fully but concisely and as directly as possible.
Follow all specific instructions for individual questions (e. g. “list”, “in point form”).
3 Answer all questions in your own words. Do not copy any text from the notes, readings
or other sources. The assignment must be your own work only.
Plagiarism declaration:
1. I know that plagiarism is wrong. Plagiarism is to use another’s work and pretend that
it is one’s own.
2. This assignment is my own work.
3. I have not allowed, and will not allow, anyone to copy my work with the intention of
passing it off as his or her own work.
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4. I acknowledge that copying someone else’s assignment (or part of it) is wrong, and
declare that my assignments are my own work.
2. Mark allocation
Each question receives a mark allocation. However, you will only receive a final percentage
mark and will not be given individual marks for each question. The mark allocation is there
to show you the weighting and length of each question.
Question 1: Present value and opportunity cost 11
Question 2: Retirement savings 20
Question 3: Repayments 19
Total: 50
3. Assignment questions
Assignment instructions
Complete the entire assignment in this document. Make sure you have read Modules 1 to 6
before completing this assignment.
Financial calculators are not allowed for this assignment – students are required to make use
of the tables (A-D) at the end of the Module 6 notes. Make sure that you show all your
working when calculations are required.
Question 1
JJ Industries is in the business of manufacturing large yachts. They have an agreement with
one of their biggest customers that they will pay off their account of R18.5 million over the
next three years, with JJ Industries receiving the payments according to the following
schedule:
End of year 1: R4,000,000
End of year 2: R6,500,000
End of year 3: R8,000,000
The business has access to a market-linked investment account, which earns them 11% a
year.
1.1 Using the tables, what PVIFs would one use to calculate the present values of each of the
three cash inflows?
Start writing here: PVIF for year 1 is 0.901, year 2 is 0.812 and year 3 is 0.731.
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1.2 What is the present value of this income stream?
Start writing here: present value of income stream is 14728680.47
1.3 What is the total opportunity cost of allowing their customer to pay over three years,
instead of right now?
Start writing here: total opportunity cost for allowing the customers to pay over the period
of three years is 37,71,320
1.4 If their customer offered them R15 million to settle their account today, would you
recommend that JJ Industries accept it? Why, or why not? (Max. 3 lines)
Start writing here: if the customer offered to settle the account today at the amount of R15
million, it is recommended to accept the offer as the present value of income stream is
coming as 14728680.47 whereas the payment offered today is more that is R15 million.
1.5 In a brief point, mention one other factor that the business should take into account
when allowing a customer to pay off an account over an extended period. (Max. 2 lines)
Start writing here: before allowing the extended period to any customer to pay off the
account is considering its credit worthiness, trustworthiness and past payment records
Question 2
Sarah has just finished her studies, and has started her career by accepting a position at an
online learning company. Being a forward-thinking young woman, she is already looking
ahead to her retirement, and wants to start putting money away now. She wants to retire 30
years from now, and wants a lump sum of R3 million at that point. To allow her to plan
effectively, and to keep things simple, she wants to put away the same amount for the full
period, at the end of each year. Using the tables, and showing your workings clearly, answer
each of the following questions:
2.1 Assuming that she receives an average growth rate of 9% p.a. for the period, how much
does Sarah need to put away at the end of each year?
Start writing here: at end of each year Sarah is required to pay 22009.05
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2.2 If she were to invest a lump sum now instead, to reach R3 million in 30 years, which also
grew at 9% p.a., compounded annually, how big would this lump sum need to be?
Start writing here: Lumpsum amount required to b einvested is 226,113
2.3 At retirement, if she were to then take that lump sum of R3 million and buy an annuity,
that would pay out annually for 20 years, and have a guaranteed annual return of 12%, how
much would she receive every year?
Start writing here: amount thst will be received by her annually is 401,636
2.4 When looking ahead to retirement, one always needs to take into account the effects of
inflation. Using the answer from question 2.3, and with an average annual inflation figure of
6% over the period, what would the value of the fifth one of these annuity payments
received (received exactly 35 years from now) be worth today?
Start writing here: today’s worth for the value of fifth one of the annuity payments received
exactly 35 years now is 52,255.
Question 3
You are in the market to buy a new car. You have spotted the one you want, an absolute
beauty of a demo model, and the sales rep has mentioned that the price is R150,000. You
want to take out a vehicle loan, and approach your bank to do so. As you meet all the
relevant affordability criteria, they are prepared to offer you a loan, fixed at 1.5% above
prime, over a period of 50 months. They will not require you to put down a deposit, or pay a
balloon payment.
3.1 What is the definition of the prime rate? (Max. 3 lines)
Start writing here: it is the rate of interest that is charged by the commercial bank to most of
their creditworthy customers. This rate is used as the single guide to compute the rate of
interest for other borrowers.
3.2 By being offered a rate above prime, does this mean you are a higher risk than someone
being offered prime, or a lower one? Explain your answer in a brief point. (Max. 3 lines)
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Start writing here: prime rate is higher than the federal rate, hence, when above prime rate
is offered, the borrower is at higher risk as compared to the prime rate.
3.3 In this context, what is a balloon payment? (Max. 4 lines)
Start writing here:it is the large payment due at the end of the ballon loan like commercial
loan, mortgage or any other type of the mortgaze loan. Ballon loan comparatively is for short
term and a proportion of loan’s principle balance is only amortized over the period.
3.4 Using the information given, and assuming a prime rate of 10.5%, what will your monthly
repayment be? Be sure to use the tables, and show your workings.
Start writing here:
Particualrs Amount
Loan Amount A 150000
Prime Rate B 10.5%
Additional Rate C 1.5%
Interest Rate p.a. D=B+C 12.0%
Compounding Period p.a. E 12
Total Nos. of Compounding Period F 50
Monthly Interest Rate G=D/E 1%
Monthly Repayment
H=(A*G)/[1-(1+G)^-
F] 3827
3.5 With that repayment figure, what would the total amount of the repayments paid over
the 50 months be?
Start writing here: total amount of repayment will be 191,345
3.6 If you happened to be sitting on some extra cash, and put down a 20% deposit, would
this affect your monthly repayment? If yes, what would it change to?
Start writing here: yes the monthly repayment will be impacted and the amount will be
changed to 3,062.
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