Financial Management: THE TIME VALUE OF MONEY 

THE TIME VALUE OF MONEY 

QUESTION 1

• John Matata has just borrowed Sh.220,000 from a bank payable at 12% per annum compounded annually to be repaid in six equal annual instalments.

These payments are to be sufficient to repay the principal amount together with interest.

 

Required;-

The loan amortisation schedule.

 

• Explain how a ranking conflict between the net present value (NPV) and the internal rate of return (IRR) can be resolved.
  • Resolving the ranking conflict of IRR and NPV

  Whenever there is a ranking conflict between the net present value (NPV) and theinternal rate of return (IRR), the project with the highest net present value (NPV) should be chosen. This is because the net present value (NPV) method ties more directly with the primary financial goal of the firm; i.e. to maximise firm value.

 

QUESTION 2

• Shadrack Chando borrowed Sh.80,000 from XYZ commercial bank at an interest rate of 1.25% compounded monthly. The loan is to be amortized using the reducing balance method and be repaid in 12 equal monthly installments payable at the end of each month. Required:
  • loan amortization schedule

 

• Bamba Ltd. has constructed a commercial building in an upmarket location in your capital city which the management intends to sell at Shs .8,400,000. However, a prospective tenant has offered to rent the offices for 8 years at a fixed annual rent of Sh. 160,000. At the end of the eighth year, the building will be sold.
  • real estate adviser estimated that the price of the building will increase by 3% per annum. The company’s cost of capital is 5%.

Required:

Advise the management of Bamba Ltd. on whether to sell the building now or rent out the offices.

 

QUESTION 3

• At the beginning of year 2008, James Chiro deposited Sh.1,000,000 in an investment account which earned compound interest at 15% per annum. At the beginning of each subsequent year, James Chiro deposited a further Sh.500,000 in the same account.

 

Required: 

• The amount of money in the investment account by the end of year 2012
• (The percentage interest earned over the investment period.

 

QUESTION 4

•  Malikia Guyo borrowed Sh.1, 000,000 from Huduma Bank at an annual compound interest of 14% on the reducing balance. The loan was repayable in annual instalments over a period of four years. The installments were payable at end of the year.

Required:

A loan amortisation schedule.