BBF201: In order to prepare to send his child to a medical school in the future, Encik Ishak wants to accumulate RM1.5 million: Introduction To Financial Management Assignment, WOU, Malaysia

QUESTION 1

(a) In order to prepare to send his child to a medical school in the future, Encik Ishak wants to accumulate RM1.5 million at the end of 15 years. Assuming that his savings account will pay 4.5% compounded annually, calculate how much he would have to deposit if:

i. he wants to deposit an equal amount at the end of each year.
ii. he wants to deposit one large lump sum today.

(b) Ravindran starts a retirement fund at age 21 and plans on depositing equal annual amounts on each birthday, starting at age 21, and ending at age 60. He wishes to have RM3 million at age 60. Chong Beng starts his fund on his 30th birthday. He wants to deposit equal annual amounts on each birthday starting on his 30th birthday and ending on his 60th birthday. Chong Beng wants to also have RM3 million at the age of 60.

If the investment funds earn 8% per annum, calculate the amounts which Ravindran and Chong Beng respectively will have to save each year to meet their goals. Justify the difference.

(c) Selinna is planning to deposit RM10,000 today into a bank account. Five years from today, she expects to withdraw RM7,500. Calculate how much money will be in the account eight years from now if the account earns 5% compound interest every year.

(d) RM9,000 is invested for 7 years and 3 months. The investment is offered at 12% compounded monthly for the first 4 years and 12% compounded quarterly for the rest of the period. Calculate the future value of this investment.

(e) An investment will pay RM500 in three years, RM700 in five years, and RM1,000 in nine years. Calculate the present value of this investment if the compound interest rate is 6% per year.

QUESTION 2

(a) Salma is considering investing in either one of the jewelry companies – Pearl Berhad or Diamond Berhad. Historical data suggests the following probability distribution for Salma’s returns from these two jewelry companies. Decide which company would give a higher expected return.

(b) The following is historical data for Security ABC and XYZ.

i. Calculate the expected return and standard deviation for the securities ABC and XYZ.

ii. Justify which of the two securities an investor will invest in if the investor is risk averse.

QUESTION 3

Aneka Selera Sdn Bhd is considering opening a new restaurant. It would cost RM1 million to open the restaurant (Year 0). The business is expected to last for about 4 years with no salvage value. The restaurant facilities would be depreciated over the 4 years on a straight-line basis.

Net cash inflows from the investment in the restaurant before deducting annual depreciation charges, starting in Year 1, are estimated as follows:

The cost of capital for Aneka Selera Sdn Bhd is 20%.

(a) Calculate the following:

(i) The payback period.
(ii) The accounting rate of return.
(iii) Internal rate of return (IRR)

(b) The supplier advises Aneka Selera Sdn Bhd to open two restaurants simultaneously in order to reduce the initial cost of investment. The total initial investment for two restaurants would be RM1.7 million, with the total annual cash inflows for both restaurants being doubled.

Calculate the new:
(i) Payback period.
(ii) Accounting rate of return.
(iii) Internal rate of return (IRR)

(c) Suggest to the company whether to open one or two restaurants simultaneously. State reasons for your answer.

Answer

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