UGBS 202 – BUSINESS MATHEMATICS

TUTORIAL SET 5 (FINANCIAL MATHEMATICS)

1. A waste treatment company is considering powering a new temporary waste disposal site
in a remotely area by either solar panels or by constructing an above ground electric line
to the facility and using conventional power. Solar panels will cost $20,000 to install and
will have a useful life of 6yrs with no salvage value. Annual cost for inspection, cleaning,
etc. is expected to be $5,000 for the first 3 years and $7,000 for the last 3 years. Solar panels
are tax free.

A new power line will cost $100,000 to install, with power costs expected to be $1000 per
year for the first 2 years, $ 800 for years 3 and 4 and $600 for year 5 and $400 for year 6.
Since the site is temporary, it will be abandoned in 6 years. It will cost $ 5000 to dismantle
the power lines but the waste can be sold for a salvage value of $6000.
Tabulate or draw the appropraite cash flow for the situuation above.

2. A trust fund for a child’s education is being set up by a single payment so that at the end
of 15 years there will be GHS50000. If the fund earns interest at the rate of 14% per
annum, how much money should be paid into the fund?

3. A 6000cedis certificate of deposit is purchased for GHS6000 and is held for seven years.
If the certificate earns an interest of 8%, what is it worth at the end of the period?

4. As a hedge against inflation, an investor purchased an item in 1990 for GHS 90000 and
this item was sold in the year 2000 for GHS250000. At what interest did the item appreciate
in value?

5. A trust fund for a 10 year old child is set up by a single payment of GHS14000. At what
age will the child’s fund accumulate up to GHS27000 given that interest rate stands at 13%
per annum.

6. Find the effective interest rates that corresponds to the following:

a. 3% compounded monthly
b. 15% compounded quarteryl
c. 10% compounded semi annually
d. 8% compounded bi monthly
e. 12% compounded weekly
f. 10% compounded daily
g. 20% compounded annually

7. Given that the interest rate in question (3) above changes to 4% compounded semi
annually, find the future value of the certificate of deposit.

8. One of your private clients has asked for your advice concerning Ghc 100M which he
wishes to invest for five years. The two alternatives are to use a Bank Account where the
36% per annum rate is compounded monthly or a Saving Fund where the 40% per annum
rate is compounded annually.
 a. Calculate the size of each fund at the end of the five years.
b. Demonstrate in tabular form the growth of the Saving Fund investment
c. Calculate the effective annual interest rate of the Bank Account investment.
d. Without using the final value of both investments as a criterion, advise your client as
to which choice to invest in.

9. Find the present value of an equal payment of GHS5000 at the end of each year for 5
years at a rate of 10% per annum. Find the present value if the interest rate is 3%
compounded quarterly

10. A loan of 3000 is to be paid in 4 equal annual installments at the rate of 12% per annum.
Find the amount of equal payments.

11. A mortgage of GH¢500,000.00 has to be repaid by equal six-monthly instalments in arrears

12. Suppose a man purchases a house with an initial downpayment of GHS20000 and then
makes annual payments of GHS8000 at the end of each year for six years and GHS14000
at the end of each year for eight more years. Given an interest of 24% per annum, find
the present value of the payments for the house.

13. Suppose GHS50 is placed in a savings account at the end of each month for four years at
a rate of 18% compounded annually. If no deposits are made:
a. how much is in the account after 6 years
b. how much of this money is interst
c. find the future worth of the money if interest rate is now 6% compounded quarterly.
d. If the amount is made at the beginning of every year for six years, find the future value
of the amount at the end of the seventh year.

14. Your company has decided to set up a welfare fund with an initial payment of 275M cedis
compounded monthlu over a four year period at an interest of 20% per annum. Calculate:
a. The size of the fund after four years
b. The effective annual interest rate

15. The academic fees of the university is set to increase by 10% each year for the next four
years. If this year’s fees is GHS1500 for a special program, what will be the present value
of the fees paid at the end of the fourth year for a newly admitted student if interest rate
is set to remain at 12% per annum?

16. The government of Ghana has contracted an oil exploration firm to explore and extract
oil from the Jubilee Fields. The company states that it will give an initial amount of $100m
at the end of the first year and increase the amout thereafter by an 20m each year for 20
years. Find the present worth of the payments.
17. A loan of 50000 cedis is to be paid in 5 equal annual installments at a rate of 15% per
annum.
a. Find the amount of equal payments
b. Draw an amortisation shecudele for this problem
c. How much debt will be outstanding after the 3rd installment

18. A manufacturing company intends to purchase a new equipment costing GH¢2 m. The
money required to buy the equipment is to be provided as a loan by the company’s bankers.
The agreed rate of interest is 20% per annum compounded annually. The loan is repayable
in full with interest at the end of 5 years. To provide for this eventual repayment, the Board
of Directors of the company has decided to set aside, equal annual amount at the end of
each year, and invest in a fund which will earn 25 percent per annum interest, with interest
compounded annually.
a. Determine the annual payment into the fund which will be sufficient to repay the loan
in five years.
b. Provide a sinking fund schedule that shows the growth of the loan and the investment

19. A company plans to buy an equipmrnt for 200m cedis half of which is due on delivery and
and the balance due exaxtly a year after. The year end cash inflows are expected to be 50m
cedis per annum for a period of 5 years. After exactly five years, the equipment will be sold
for 10m cedis. If the company has to borrow at a rate of 20% per annum, determine
whether this is a worthwhile investment.

20. Quotations have been received from three firms for the purchase of a new machine at a
cost of 16000 cedis. The terms of settlement are as follows for each firm
Firm A
Pay 8000 cedis on delivert and 2000 cedis at the end of each of the following four years
Firm B
Pay 4000 cedis att he end of each year for the next four years
Firm C
Pay 5000 cedis on delivery, 3000 at the end of the second and third years and 5000 at the
end of the fourth year.

Using the NPV criterion, and a discount rate of 10%, advise on which firm the machine
should be purchased from

21. Your company has to choose between two investments A and B each of which has a life
of 4 years. Machines A and B cost 50000 cedis and 45000 cedis respectively. The year end
cash flows are as follows:
Year Machine A Machine B
1 25000 12000
2 24000 15000
3 16000 20000
4 10000 35000

a. Using a cost of capital of 14%, and the NPV criterion, determine which machine you
would recommend
b. Estimate the IRR for both machines and determine which one you would recommend.
22. Two machines, A and B have a lifespan of 16 and 18 years respectively. Machine A costs
200000 cedis and has an annual cash flow of 17000 cedis. Machine B on the other hand
costs 170000 cedis and has an annual cash flow of 14500 cedis over its lifespan. Using the
payback period criterion, advise on which machine to purchase if:
a. Interest rate is 0% per annum
b. Interest rate is 12% per annum

23. A company plans to invest in one of two machines, machine A and Machine B. Machine
A costs 80000 cedis and has a salvage value of 7000. MAvhine B on the other hand costs
120000 cedis and has a salvage value of 12000 cedis. Both machines have a useful life of
five years. The year end cash flows for both machines are as given below.

Period 1 2 3 4 5
Machine A 25000 45000 40000 20000 19000
Machine B 30000 50000 50000 50000 27000

a. Using the payback period criteriion,which of the machines should the company choose
(Assume interest rate to be zero)
b. Will your decision in (a) above change if interest rate is 10% per annum
c. State one advantage and one disadvantage of the payback period criterion of
investment appraisal
d. Using the NPV criterion, find which maching the company should choose using an
interest rate of 20% per annum.
e. Will your choice in (d) above change if the interst rate is changed to 25% per annum?
f. State one advantage and two disadvantages of the NPV criterion of investment
appraisal
g. Advice management on the choice of machine to use based on the internal rate of
return criterion
h. If machine B now has a useful life of 6 years where the cashflow for year 6 is 14000
cedis with a salvage value of 5000 cedis, advise management on the choice of machine
based on the annual worth analysis.

24. A company wishes to evaluate two alternative machines for an upcoming project. Machine
A costs 250000 cedis with annual operating cost being 40000 cedis. Machine B has costs
370000 cedis with an annual operating cost of 50000 cedis. Machine A and Machine B
have a useful life of 3 years and 5 years respectively. Assume the company uses an interst
rate of 8% per year compounded quarterly:
a. Find the effective annual interest rate for the company’s interest rate
b. What is the best alternative based on annual worth analysis.