The future value of the cash inflows is approximately
[1] R326 950.
[2] R271 470.
[3] R169 330.
[4] R218 000.
[5] R250 000.
The following table represents the cash inflows of a boutique for nine years.
Year Cash inflow
(R)
3 45 000
6 90 000
9 115 000
The applicable interest rate is 11,59% per year. The present value of the cash outflows is R95 000.
26
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If the NPV (Net Present Value) of a shop is R195 000 and the profitability index is 1,24375, the initial
investment in the shop is
[1] R86 908.
[2] R800 000.
[3] R195 000.
[4] R156 784.
[5] none of the above.
The following table represents the annual income (after tax) of an investment:
Years After-tax income
R
1 200 000
2 500 000
3 300 000
4 400 000
5 700 000
6 300 000
If the average rate of return is 8,421%, then the original investment (rounded off to the nearest R1 000) was
[1] R2 400 000.
[2] R4 750 000.
[3] R40 000.
[4] R1 497 000.
[5] none of the above.
You must choose between two investments, X and Y . The profitability index (PI), net present value (NPV)
and internal rate of return (IRR) of the two investments are as follows:
Criteria Investment X Investment Y
NPV R44 000 −R22 000
PI 1,945 0,071
IRR 16,00% 8,04%
Which investment(s) should you choose, taking all the above criteria into consideration, if the cost of capital
is equal to 12% per year?
[1] X
[2] Y
[3] Both X and Y
[4] Neither X nor Y
[5] Too little information to make a decision
An investment with an initial outlay of R500 000 generates five successive annual cash inflows of R75 000,
R190 000, R40 000, R150 000 and R180 000 respectively. The internal rate of return (IRR) is
[1] 7,78%.
[2] 27,0%.
[3] 9,48%.
[4] 21,3%.
[5] none of the above
Find the lump sum deposit which will give $3,092 in 10 years in an
account paying 5.01% compounded quarterly.
Working at Home The number of persons working out of their homes has been increasing rapidly in recent years. Figure 6.6 illustrates data gathered in a study reped ing the aber of persons working at bome 35 or more hours per week. The data appeen to be simos quadratic in appearance. Using the date for 1986 and 1988 and the projectad value for 1090, determine the quadratic estimating function -f(0, where nequals the number of persons working 35 ur mors hours per week at home (stated in thousand) and tequals time measured in years since 1986. According to this function, what is the number of persons working at home expected to equal in 1995? In 20007
Suppose that the share price of company B is currently trading at £20
on the London Stock Exchange. The annual share price evolves according
to a geometric Brownian motion with drift parameter µ = 0.7 and
volatility parameter σ = 1.2. Suppose also that the continuously
compounded interest rate is 4%.
(a) What is the share price at time t, S(t), equal to, under the above
assumptions? [2]
(b) Find the probability that after 5 weeks the share has at least
doubled its value. [4]
(c) What would change in the evolution of the share price, if it
followed the risk-neutral [2] geometric Brownian motion?
(d) Suppose that there exists a European call option written on the
share price of [2] company B with strike price K and and maturity time
T. Write down the BlackScholes formula for the price of this option.
(e) What is the probability that you will exercise this call option
with strike price [5] K = £22 at maturity T = 4 months?
FIND THE AMOUNT BY WHICH THE COMPOUND INTEREST IS LARGER THAN THE
SIMPLE INTEREST. ROUND TO THE NEAREST CENT.
Principal: $7825 Rate: 6% Years: 7
