University of Botswana

Mathematics Department

MAF102 (Mathematics of Finance II) Tutorial 2

1. A company intends to put P 2.2386 into an investment project which provides

P 1.2m, P 1.5m and P 2m at the end of 3 years, 8 years and 12 years respectively.
Show that the internal rate of return is 10% per annum.

2. A firm has a capital budget of 100 which must be spent on one of two projects, each
requiring a present outlay of 100. Project A yields a return of 120 after one year,
whereas Project B yields 201.14 after 5 years. Calculate:

(ii) (i) The NPV of each project using a discount rate of 10%;
(ii) The IRR of each project.
(iii) What are the project rankings on the basis of these two investment decision
rules?
Solution

(i) N P V (A) = 9.09; N P V (B) = 24.89, B > A.

(ii) IRR(A) = 20%; IRR(B) = 15%, A > B.

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3. You are given the following rates of interest rate
Where

y iy1 iy2 iy3 iy4 iy5 iy+5

1992 8.25 8.25 8.4 8.5 8.5 8.35
1993 8.5 8.7 8.75 8.9 9.0 8.6
1994 9.0 9.0 9.1 9.1 9.2 8.85
1995 9.0 9.1 9.2 9.3 9.4 9.1
1996 9.25 9.35 9.5 9.55 9.6 9.35
1997 9.5 9.5 9.6 9.7 9.7
1998 10.0 10.0 9.9 9.8
1999 10.0 9.8 9.7
2000 9.5 9.5
2001 9.0

• Column y is The Calender Year of Original Investment.

• Columns iy1 , iy2 , iy3 iy4 , iy1 are Investment Year Rates in %.
• Column iy+5 are Portfolio Rates.

Determine the ranking of P, Q, R.

Solution

P = 1314.13, Q = 1280.82 R = 1324.95

Thus
R>P >Q

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4. Fund X has unit values which are 1.0 on January 1, 2015, 0.8 on July 1 2015 and 1.0
on January 1 2016. A fund manager receives contributions of 100, 000 on January
1, 2015 and 100, 000 on July 1 2015 and immediately uses the entire contribution
to purchase units in Fund X. Find the time-weighted and the dollar-weighted rate
return for 2015.
Solutions

iT = 0, iD = 0.1667

5. You are given the following information about activities in two different investment
accounts:

Date Account K Fund Value Before Activity Deposit Withdraw

1/1/2015 100.0
7/1/2015 125.0 X
10/1/2015 110.0 2X
12/31/2015 125.0

Date Account K Fund Value Before Activity Deposit Withdraw

1/1/2015 100.0
7/1/2015 125.0 X
12/31/2015 105.8

During 2015, the dollar weigted return for investiment account K equals the time
weighted return for investiment account L which is i. Calculate i.
Solution
i = 0.15

6. On January 1, 2012 an investiment account is workth 100, 000. On April 2013 the
value has increases to 103, 000 and 8, 000 is withdrawn. On January 1 2015 the
account is worth 103, 992. Assuming the dollar-weighted method for 2013 and the
time weigthed method, the effective annual interest rate was equal to x for both
2013 and 2014. Calculate x.
Solution
x = .0625