QUIZ1/MAF253/EXAMPLE

MAF 253 : QUIZ

PART A:
TIME VALUE OF MONEY

i) A 2021 advertisement in the NST seeks offers on a 2001 Mini Cooper that had been stored
undriven in a climate controlled environment for 20 years. If the original owner paid RM10,000
for this car in 2001, determine the price that he could receive in 2021 to obtain a 10% annual
return on his investment.
(2 marks)
ii) Nikki just had a new born son. She wants to set aside some money for her son's college
expenses in 16 years. If the tuition's total cost is RM100,000 when he turns 16, how much
does she have to save per year? Assume she earns 5% annually compounding.
(2 marks)

iv) Encik Fahmy expects to receive a total dividend of RM3,500 per year for 5 years and
RM5,000 per year for the 5 years after that. Encik Fahmy wants to know how much the value
of these 10 year cash flow is today. The discount rate for this investment is 8% per annum.
(3 marks)

v) Mrs Tinsdale has just retired after 25 years with the toys company. Her total pension funds
have an accumulated value of RM220,000 and her life expectancy is 15 more years. She
assumes that she can earn a 12% return on her assets. Find her yearly annuity for the next
15 years.
(2 marks)

vi) Jian will receive RM8,500 a year for the next 15 years from his trust fund. If an 11% interest
rate is applied, find the current value of the future payments.
(2 marks)

vii) Jackson needs RM28,974 at the end of 10 years and his only investment outlet is an 8%
long term certificate of deposit (compounded annually). With the certificate of deposit, he
makes an initial investment today.

Required:
a) Compute the single payment that could be made to achieve this objective.
b) Compute the amount that he could pay at the end of each year annually for 10 years to
achieve this same objective.
(4 marks)

viii) Joony wants to buy new mixing machine to cater the increase in demand of his products.
The cost of the new machine is RM25, 000 and he pays deposit of 20% from the cost price.
The balance of will be repaid within 4 years period and requires payments of twice a year. The
interest is charged at 16% per annum.

Required:
Determine
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a) the amount of his loan repayment

b) the amount of principal paid at the end of second year.
(5 marks)
(Total: 20 marks)
PART B:

RISK AND RETURN

a. Humaizi is considering investing in Apple Bhd and Melon Bhd. He had gathered the
following information to aid his decision making.

Apple Bhd Melon Bhd

Economic
After tax cash flows After tax cash flows
condition Probability Probability
(RM) (RM)
Boom 0.50 2,500 0.30 2,800
Stable 0.30 1,800 0.45 2,200
Recession 0.20 1,000 0.25 800
Required:

i. Calculate the expected annual cash flow for each project.

(3 marks)

ii. Calculate the standard deviation for each project.

(4 marks)

iii. Calculate the coefficient of variation for each project.

(1 mark)

iv. If Humaizi is a risk taker, which company will he invest in and why?
(2 mark)
(Total: 10 marks)

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SUGGESTED SOLUTION
PART A:

TIME VALUE OF MONEY

Question (a)
i)
FV = PV (FVIF I, n)
= 10,000 (FVIF 10%, 20)
= 10,000 (6.7275)
= RM67,275 (4 x ½ = 2 marks)

ii)

FVA16 = PMT FVIFA(5%,16)

100,000 = PMT (23.657)
PMT = 100,000
23.657
= RM4,227.08
(4 x ½ = 2 marks)

iii)

PV = RM3,500 PVIFA(8%,5) + RM5,000 PVIFA(8%,10-5)

= RM3,500(3.9927) + RM5,000(6.7101-3.9927)
= RM13,974.45 + RM13,587
= RM27,561.45
(6 x ½ = 3 marks)

iv)
PVA = A (PVIFA i.n)
220,000 = A (PVIFA 12%, 15)
A = 220,000/ 3,6048
A = RM61,029.74 (4 x ½ = 2 marks)
v)
PVA = 8,500 (1 – (1/1.11^15))/0.11
= 8,500 (7.1909)
= RM61,122.65
(4 x ½ = 2 marks)
vi)
a) PV = FV (PVIF i,n)
= 28,674 (PVIF 8%,10)
= 28,674 (0.4632)
= RM13,420.76

b) PVA = A (PVIFA i,n)

28,974 = A (PVIFA 8%,10)
A = 28,974/6,7101
A = RM4,317.97
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(8 x ½ = 4 marks)
viii)

PVA = A (PVIFA I,n)

20,000 = A (PVIFA 8%, 8)
A = 20,000/5.7466
A = RM3,480.32

Semi Opening Bal Installment Interest Principal Closing Bal.

annual
1 20,000 3,480.32 1,600 1,880.32 18,119.68
2 18,119.68 3,480.32 1,449.57 2,030.75 16,088.93
3 16,088.93 3,480.32 1,287.11 2,193.21 13,895.72
4 13,895.72 3,480.32 1,111.66 2,368.66 11,527.06

Amount of principal paid at the end of Y2 = RM8,472.94

(10 x ½ = 5 marks)
(Total: 20 marks)

PART B:

RISK AND RETURN

a. Humaizi is considering to invest in Apple Bhd and Melon Bhd. He had gathered the
following information to aid his decision making.

i. Calculate the expected annual cash flow for each project.

ii. Calculate the standard deviation for each project.
iii. Calculate the coefficient of variation for each project.

Apple Bhd
Economic After tax Pi x Ri 2
�𝑅𝑅𝑖𝑖 − 𝑋𝑋� 𝑃𝑃𝑖𝑖
Probability
condition cash flows
(2,500-1,990)2 x 0.50=
Boom 0.50 2,500 1,250�
130,050�
(1,800-1,990)2 x 0.30=
Stable 0.30 1,800 540�
10,830�
(1,000-1,990)2 x 0.20=
Recession 0.20 1,000 200�
196,020�
𝑋𝑋 = 1,990 σ2 = 336,900

𝑆𝑆𝑆𝑆𝑆𝑆. 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑, 𝜎𝜎 = √336,900 = 580.4309

580.4309
𝐶𝐶𝐶𝐶 = = 0.2917
1,990

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Melon Bhd
Economic After tax Pi x Ri 2
�𝑅𝑅𝑖𝑖 − 𝑋𝑋� 𝑃𝑃𝑖𝑖
Probability
condition cash flows
(2,800-2,030)2 x 0.30=
Boom 0.30 2,800 840�
177,870�
(2,200-2,030)2 x 0.45=
Stable 0.45 2,200 990�
13,005�
(800-2,030)2 x 0.25=
Recession 0.25 800 200�
378,225�
𝑋𝑋 = 2,030 σ2 = 569,100

𝑆𝑆𝑆𝑆𝑆𝑆. 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑, 𝜎𝜎 = �569,100 = 754.3872

754.3872
𝐶𝐶𝐶𝐶 = = 0.3716
2,030
(�16 x ½ = 8 marks)

iv. If Humaizi is a risk taker, which company will he invest in and why?

Humaizi will choose to invest in Melon Bhd� as it is higher risk and gives higher
return.�
(2 mark)
(Total: 10 marks)