TUTORIAL 5

DISCOUNTED CASH FLOW VALUATION

1. Marnisal managed to receive JPA Scholarship that will pay her RM500 a month,
starting today, and continuing for the next 36 months. Which of the following
terms best describes these scholarship payments?

A. Consol.
B. Perpetuity.
C. Annuity due.
D. Ordinary annuity.

2. Which of the following best describe the meaning of annuity?

A. A series of constant, or level, cash flow that occur at the end of each period for
some fixed number of period.
B. Illustrate the process of calculating the value of future cash flow.
C. Cash flow that occur at the beginning of the period.
D. Cash flow that occur at the end of the period.

3. Identify which of the following is the annuity present value formula?

A. C {{1 - [1/(1 r)t]} r}

B. C {1 - [r/(1 + r)t]}/r
C. C {{1 - [1/(1 + r)t]}/r}
D. C {1 - [r/(1 r)t]} r

4. Which of the following represent perpetuity?

A. Apartment rent payment of RM800 a month for one year.

B. Trust income of RM1,200 a year forever.
C. Car payment of RM260 a month for 60 months.
D. Retirement pay of RM2,200 a month for 20 years.

5. Which of the following characteristics apply to perpetuity?

I. Constant cash flow dollar amount.

II. Unequal cash flow dollar amount.
III. Limited time period.
IV. Infinite time period.

A. I and III only.

B. I and IV only.
C. II and III only.
D. II and IV only.

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6. Stated interest rate is the interest rate expressed:

A. in terms of the interest payment made each period.

B. in terms of an effective rate.
C. as the quoted rate compounded by 12 periods per year.
D. in terms of the rate charges per day.

7. Which one of the following statements is correct concerning an annuity interest

rate?

A. All else constant, a larger deposit is required today to purchase the same annuity
payments if the annuity interest rate is increased.
B. Annuities are always valued using an annuity interest rate that is between 7 and 9
percent.
C. The annuity interest rate is the discount rate used to find the present value of the
annuity payments.
D. An increase in the annuity interest will affect the value of an ordinary annuity, but,
will not affect the value of an annuity due.

8. Beh Xiao just financed a used car through his credit union. His loan requires
payments of RM300 a month for 3 years. Assuming that all payments are paid
timely. His last payment will pay off the loan in full. What type of loan does Beh
Xiao have?

A. Amortized.
B. Lump sum.
C. Interest-only.
D. Pure discount.

9. Which one of the following statements is CORRECT?

A. The APR is equal to the EAR for a loan that charges interest monthly.
B. The EAR is always greater than the APR.
C. The APR is the best measure of the actual rate you are paying on a loan.
D. The EAR, rather than the APR, should be used to compare both investment and
loan options.

10. Which one of the following is an annuity due?

A. RM100 paid at the end of each monthly period for one year.
B. RM600 paid at the beginning of every quarter for five years, starting today.
C. RM900 paid today & RM800 paid every year for ten years starting one year from
today.
D. RM400 paid weekly for one year starting one week from today.

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11. Sam Inc. decided to save money each year for the next 4 years to help fund a new
building. If it earns 4.8 percent on its savings, how much will the firm have saved
at the end of year 4?

Year Amount
saved
1 RM15,000
2 RM15,500
3 RM25,000
4 RM32,200

12. Intan Gold & Diamond Sdn. Bhd. signed a RM1.5 million contract. The contract
calls for a payment of RM0.2 million today, RM0.5 million one year from today,
and RM0.8 million two years from today. What is this contract worth today if the
firm can earn 6.5 percent on its money?

13. Wahid Company had just invested in a plan that will pay RM1,200 in one year,
RM900 in two years, RM1,500 in three years and RM2,200 in four years. If the
interest rate is 10 percent, what is the value of this cash flow in year 4? In year 9?

14. Mariani is considering which one of two projects she should accept. Both projects
have the same start-up costs. Project A will produce annual cash flow of
RM50,000 a year for 5 years. Project B will produce cash flow of RM45,000 a
year for 7 years. The company requires a 15 percent rate of return. Which project
should the company select and why?

15. Calculate the future value of semi-annual payments of RM8,000 for eight years at
12 percent?

16. How much money does Sarah need to have in her retirement savings account
today if she wishes to withdraw RM15,000 a year for 35 years. She expects to
earn an average return of 3.7 percent.

17. You want to purchase a new house which costs RM350,000. Your plan is to pay
20 percent down in cash and finance the balance over 25 years at 5.25 percent.
What will be your monthly mortgage payment and do you afford to pay it with
your current salary of RM3,000?

18. Linda Trading spent RM25,800 to refurbish her current office. The firm borrowed
80 percent of the refurbishment cost at 6.7 percent interest for 5 years. What is the
amount of each monthly payment?

19. You just received a loan offer in the mail. The company is offering you RM5,000
at 10.5 percent interest. The monthly payment is only RM99. If you accept this
offer, how long will it take you to pay off the loan?

20. The manager of Siu Meis Boutique has granted Kevins application for credit.
The maximum payment that has been approved is RM100 a month for 24 months.
The APR is 12.8 percent. What is the maximum initial purchase that Kevin can
make given this credit approval?

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21. A preferred stock pays an annual dividend of RM5. What is one share of this stock
worth to you today if you require a 12 percent rate of return?

22. Farid Store is going to make a major expansion for 3 years from today. In
preparation for this, the company is setting aside RM40,000 each year, starting
today, for the next 3 years. How much money will the firm have when it is ready
to expand if it can earn an average of 7.25 percent on its savings?

23. Calculate the effective annual rate of 14.2 percent compounded quarterly.

24. A loan that compounds interest monthly has an EAR of 13.3 percent. What is the
APR?

25. Saodah Boutique needs RM33,000 today to fund a new project. The project will
not produce any cash flows for 3 years and thus the firm agreed to a 3-year, pure
discount loan at 7.8 percent interest. How much will the firm owe on this loan at
the time it must be repaid?

26. Dayang Inc. took out a 5.6 percent interest-only loan of RM65,000 for 4 years.
Payments are to be made at the end of each year. Calculate the total interest and
total payment that will be due at the end of year 4 with given table below.
Year Interest Principal Paid Total
(RM) (RM Principal Paid
(RM)

27. Wahid Farms is borrowing RM87,000 for 3 years at an APR of 6 percent. The loan
calls for the principal balance to be reduced by equal amounts over the life of the
loan. Interest is to be paid in full each year. The payments are to be made annually
at the end of each year. How much will Wahid Farms pay in interest over the life
of this loan?

Beginning Total Interest Principal Ending

Year Balance Payment Paid Paid Balance
(RM) (RM) (RM) (RM) (RM)

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28. Referring to Question 27, assuming Wahid Farms has to make single, fixed
payment every year. Prepare the amortization schedule

Year Beginning Total Interest Principal Ending

Balance Payment Paid Paid (RM) Balance
(RM) (RM) (RM) (RM)

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