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Ngee Ann Polytechnic
School of Business & Accountancy
Finance and Accounting for Business, October 2023 Semester
Week 6: Tutorial 5 - Time Value of Money (TVM)
Part 1: MCQs
1. When simple interest is paid for an investment, this means:
A. the interest rate is lower than other comparable investments.
B. the future value of the investment will be low.
C. the earned interest is non-taxable to the investor.
D. interest is earned only on the original amount invested.
2. When compound interest is applied to the investment, it means that:
A. interest is only earned on the original investment amount.
B. interest is paid on previously earned interest.
C. the investment likely lasts more than 1 year.
D. interest is paid monthly instead of yearly.
3. Which of the following will result in a lower future value?
A. A higher interest rate
B. Increasing the time period
C. More frequent compounding
D. A lower future value interest factor
4. Which of the following will increase the present value of an investment?
A. Increase the time period.
B. Decrease the interest rate.
C. Increase the present value interest factor.
D. Discount the future value more frequently.
Part 2: Short Questions
Question 1
You plan to purchase a piece of equipment at $250,000 for your KAB start-up in its 8th year
of business. You are now offered a structured deposit that guarantees compound interest of
5%. How much do you have to place in the structured deposit now, in order to have enough
funds to meet your equipment purchase in year 8? Show all workings clearly and round off
your answers to 2 decimal places.
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Question 2
You have $50,000 now. If you invest this amount at the compound interest of 1.5%, what is
the amount you will get at the end of 3 years? Show all workings clearly and round off your
answers to 2 decimal places.
Question 3
You have been offered 2 investment opportunities:
Investment 1: Receive $10,000 at the end of 10 years or
Investment 2: Receive $25,000 at the end of 20 years
Use present values to determine which investment opportunity is more attractive, at an
interest rate of 7.5% compounded annually. Show all workings clearly and round off your
answers to 2 decimal places.
Question 4
You are evaluating a personal loan that requires yearly repayments of $20,000 from years
1 to 4. If the interest rate is compounded at 6% per annum, find the total value of these
cashflows at the end of year 4. Show all workings clearly and round off your answers to 2
decimal places.
Question 5
You have been offered a deposit account that requires an initial deposit of $10,000 now,
after which yearly deposits of $5,000 is required from next year onwards. With a compound
interest of 3% per annum, how much will you have in your account at the end of 3 years?
Show all workings clearly and round off your answers to 2 decimal places.
Question 6
The year is 2022 now and your KAB start-up signed up for a corporate insurance plan that
requires annual premium payments shown in the table below. What is the present value of
this cashflow stream if the interest rate is compounded at 6% per annum? Show all workings
clearly and round off your answers to 2 decimal places.
Year Cashflow ($)
2023 200
2024 400
2025 300
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Question 7
Your start-up business wants to buy a new machine. The seller gives you the choice to pay
$25,500 cash now, or make three equal payments of $9,500 at the end of each year. If your
cost of money is compounded at 8% per annum, which offer do you prefer?
Question 8
Which one of the three options would give you the highest value?
- Option A: receive $20,000 today;
- Option B: receive $10,550 each at the end of each year for two years;
- Option C: receive $7,500 each at the end of each year for three years.
Assuming the discount rate is 6% p.a.