Marking Guide and suggested solutions for Group Assignment
MGMT2023, Semester 1, 2024
Question 1: 5 marks
I-SEE-U Inc., a maker of CCTV cameras, is considering a hardware
marketing chain to sell its cameras. As per the deal, I-SEE-U will be
paid $35,000 and $10,000 at the end of years 1 and 2 and to make
annual year-end payments of $5,000 in years 3 through 9. A final
payment of $20,000 would be due at the end of year 10. A second company
has offered to market the cameras for a one-time payment of $80,000.
Which offer should I-SEE-U accept? Support your answer with relevant
calculations. The required return is 12%
PV of payments from the first company:
Computational
Computational remarks: Years Payments remarks:
35,000 = FV; 1 = N; 12 = I/Y; CPT PV = 31,250 1 $35,000 35,000/1.12
Continue down the column likewise and add 2 $10,000 10,000/1.12^2
all PVs at the end Continue down
3 $5,000 the column
likewise & add
Alternatively, use the CF function of the calculator as 4 $5,000
shown below 1 mark
5 $5,000
6 $5,000
7 $5,000
8 $5,000
9 $5,000
10 $20,000
PV (Excel Solution) $63,852.40
CF0 = 0; CF1 =
35,000; CF2 =
10,000; CF3 to 3 marks
CF9 = 5,000;
CF10 = 20,000,
I = 12, NPV CPT
PV (Calculator steps and solution) = $63,852.3974
Accept the second company's offer because its PV is
higher 1 mark
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Alternatively, the students can arrive at the same conclusion using
the future value method as follows:
FV of payments from the first company:
Computational
Computational remarks Years Payments FV remarks:
35,000 = FV; 9 = N; 12 = I/Y, CPT FV = 95,057.75 1 $35,000 $97,057.76 35,000 x 1.12^9
Continue down the column likewise and add 2 $10,000 $24,759.63 10,000 x 1.12^8
Continue
3 $5,000 $11,053.41 down
the column
4 $5,000 $9,869.11 likewise &
add
5 $5,000 $8,811.71 2 marks
6 $5,000 $7,867.60
7 $5,000 $7,024.64
8 $5,000 $6,272.00
9 $5,000 $5,600.00
10 $20,000 $20,000.00
FV (Formula calculation) $198,315.85 1 mark
Some students may use a
financial calculator app
which allows for the
computation of NFV. In
such a case also, award
full credit.
FV of payment from the
second company (Formula $248,467.86
calculation)
80,000 = PV; 1 mark
FV of payment from the
10 = N; 12 =
second company
I/Y; CPT FV =
(Calculator solution)
$248,467.8567
Accept the second company's offer because of a
1 mark
higher FV
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Question 2: 5 marks
You have decided to endow your favourite university with a
scholarship. It is expected to cost $15,000 per year to attend the
university into perpetuity. You expect to give the university the
endowment in 5 years and will accumulate it by making equal annual
(end-of-year) deposits into an account.
The rate of interest is expected to be 8% for all future time periods.
a) How large must the endowment be?
b) How much must you deposit at the end of each of the next 5 years
to accumulate the required amount?
Manual computation of required endowment funds: 15,000 / 0.08 = $187,500
Endowment (Formula calculation) $187,500.00 2 marks
PMT (Excel Solution) $31,960.59
187,500 = FV; 5 3 marks
= N; 8 = I/Y;
CPT PMT =
PMT (Calculator solution) $31,960.5852
Question 3: 20 marks
Paul Atreides wants to save money to meet three objectives. First, he
would like to be able to retire 20 years from now with retirement
income of $15,000 per month for 20 years, with the first payment
received 20 years and 1 month from now. Second, he would like to
purchase a cabin in Rivendell in 10 years at an estimated cost of
$100,000. Third, after he passes on at the end of the 20 years of
withdrawals, he would like to leave an inheritance of $100,000 to
Chani, his girlfriend. He can afford to save $3,000 per month for the
next 10 years. If he can earn an 10 percent EAR before he retires and
an 9 percent EAR after he retires, how much will he have to save each
month in years 11 through 20?
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First, arrange the information for
easy reference as follows:
Number of years to retire 20
Retirement income desired per month
for 20 years $15,000
Number of years retirement income
desired for 20
Number of years before first
retirment payment 20
Cabin purchase $100,000
Years to go before cabin purchase 5
Inheritance to be left $100,000
Per month savings for first 10 years $3,000
EAR till retirement 10%
EAR after retirement 9%
savings between years 11 and 20 ?
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Then, perform a step-wise analysis as follows:
Step 1: Convert EAR to Excel Calculator Steps &
Marks
annual nominal rates Solution Solution
2nd function,
Per annum Nominal Rate ICONV, EFF = 10,
9.57% 2 marks
before retirement C/Y = 12, NOM =
9.57
2nd function,
Per annum Nominal rate
8.65% ICONV, EFF = 9, C/Y 2 marks
after retirement
= 12, NOM = 8.65
Step 2: Amount needed at
the 20-year mark from
now
15,000 = PMT, 240 =
Amount needed at N, 8.65/12 = I/Y,
$1,709,863.16 2 marks
retirement in 20 years CPT PV =
$1,709,712.93
100,000 = FV,
Plus, PV of inheritance 8.65/12 = I/Y, 240
$17,843.09 2 marks
to be left = N, CPT PV =
$17,838.7952
1,709712.93 +
Total needed in 20
$1,727,706.25 17,838.7952 = 2 marks
years' time
$1,727,551.7252
Step 3: Amount in hand
at the 10-year mark from
now
3,000 = PMT, 120 =
Value of savings for
N, 9.57/12 = I/Y,
first 10 years @$3,000 $599,591.57 2 marks
CPT FV =
per month
$599,626.7954
Less cabin purchase $100,000.00
599,626.7954 -
Amount available at the
$499,591.57 100,000 = 2 marks
10-year mark
$499,626.7954
Step 4: Amount required
at the 10 year mark
Years left to retire 10
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499,626.7954 = PV,
Amount available at the
120 = N, 9.57/12 =
10-year mark will grow $1,295,811.87 2 marks
I/Y, CPT FV =
in the next 10 years to
$1,296,035.8532
Step 5: Required per
month saving between
year 11 to 20
1,727,551.7252 -
Amount by which short at
$431,894.39 1,296,035.8532 = 2 marks
retirement
$431,515.8718
431,515.8718 = FV,
Between years 11 and 20 120 = N, 9.57/12 =
$2,160.94 2 marks
required savings I/Y, CPT PMT =
$2,158.92
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