Case Study on Motivation

Assignment No. 02
Financial Management & Policy
PROGRAM: MBA

Question No. 1 a) You need to have $50,000 at the end of 10 years. To accumulate this sum, you have decided to save a certain amount at the end of each of the next 10 years and deposit it in the bank. The bank pays 8 percent interest compounded annually for long-term deposits. How much will you have to save each year (to the nearest dollar)? b) Vernal Equinox wishes to borrow $10,000 for three years. A group of individuals agrees to lend him this amount if he contracts to pay them $16,000 at the end of the three years. What is the implicit compound annual interest rate implied by this contract (to the nearest whole percent)?
Question No. 2 a) You have been offered a note with four years to maturity, which will pay $3,000 at the end of each of the four years. The price of the note to you is $10,200. What is the implicit compound annual interest rate you will receive (to the nearest whole percent)? b) Sales of the P.J. Cramer Company were $500,000 this year, and they are expected to grow at a compound rate of 20 percent for the next six years. What will be the sales figure at the end of each of the next six years?

Question No. 1
You need to have $ 50000 at the end of 10 year. To accumulate this sum, you have decided to save a certain amount at the end of each year of next 10 years and deposit it in the bank. The bank pay 8 % interest compounded annually for long-term deposits. How much will you have to save each year (to the nearest dollar)?
Solution:
F.V = $ 50000 n = 10 year r = 8 % p.a
Installments (p) = ?
By using F.V annuity formula
F. V a = P[(1+r)n-1/r]
50000 = P[(1+0.08)10-1/0.08]
P = 3453.04

b)

Vernal Equinox wishes to borrow $ 10000 for three years. A group of individuals agree to lend him this amount if he contracts to pay them $ 16000 at the end of the three years. What is the implicit compound annual interest rate implied by this contract ( to the nearest whole present)?
Solution:
P.V = 10000
F.V = 16000 n = 3 years r =?
F.V = P.V (1+r)n
16000 = 10000(1+r)3
1.61/3 = (1+r) r = 16.96%

Question No. 2

a)
You have been offered a note with four years to maturity, which will pay $3,000 at the end of each of the four years. The price of the note to you is $10,200. What is the implicit compound annual interest rate you will receive (to the nearest whole percent)?

R= 6%

b)
Sales of the P.J. Cramer Company were $ 500000 this year, and they are expected to grow at a compound rate of 20 % for next 6 years. What will be the sales figure at the end of each of the next six year?
Solution:
P.V = 500000 r = 20 % We will find the F.V at the end of each next six years
F.V = p (1+r)n
F.V year 1 = 500000(1+0.20) = $ 600000
F.V year 2 = 500000(1+0.20)2= $ 720000
F.V year 3 = 500000(1+0.20)3=$ 864000
F.V year 4 = 500000(1+0.20)4=$ 1036800
F.V year 5 = 500000(1+0.20)5=$1244160
F.V year 6 = 500000(1+0.20)6=$1492992