Finance Management Assignment

Aulia Ridho Muhammad

293191007

INSTITUT TEKNOLOGI BANDUNG

MASTER OF BUSINESS ADMINISTRATION
2020
P5–5 Time value You have $1,500 to invest today at 7% interest compounded annually.
a. Find how much you will have accumulated in the account at the end of (1) 3 years, (2) 6
years, and (3) 9 years.
𝐹𝑉 = 𝐶 ∗ (1 + 𝑟)𝑛

1. 𝐹𝑉 = 1500 ∗ (1 + 0.07)3
𝐹𝑉 = 1837.56

2. 𝐹𝑉 = 1500 ∗ (1 + 0.07)6
𝐹𝑉 = 2251.1

3. 𝐹𝑉 = 1500 ∗ (1 + 0.07)9
𝐹𝑉 = 2757.69

b. Use your findings in part a to calculate the amount of interest earned in (1) the first 3 years
(years 1 to 3), (2) the second 3 years (years 4 to 6), and (3) the third 3 years (years 7 to 9).
1. $ 1.837,56 – $ 1.500 = $ 337,56
2. $ 2.251,10 – $ 1.837,56 = $ 413.53
3. $ 2.757,68 – $ 2.251,09 = $ 506.59
c. Compare and contrast your findings in part b. Explain why the amount of interest earned
increases in each succeeding 3-year period.

Present Value -1500 -1500 -1500

Annual Rate of Interest 7% 7% 7%
Number of years 3 6 9
Future Value $1.837,56 $2.251,10 $2.757,69
Amount of Interest $337,56 $413,53 $506,59

The Amount of the present value amount is in the same value. It cost $ 1.500, if we see the
table, the interest is still in a same rate can produce different kind of income, depending on how
long that we invested. The first three year, the interest earned can earned $337,5, the second three
years can earned $413,53, and the last 3 year can generate $506,59. It means, in the range of three
years we can get the different income if we invest the money now and investing in a long period
will give us more money from the interest.
P5–15 Time value and discount rates You just won a lottery that promises to pay you $1,000,000 exactly
10 years from today. Because the $1,000,000 payment is guaranteed by the state in which you live,
opportunities exist to sell the claim today for an immediate single cash payment.
a. What is the least you will sell your claim for if you can earn the following rates of return on
similar-risk investments during the 10-year period?
(1) 6% (2) 9% (3) 12%

$ 1.000.000 $ 1.000.000 $ 1.000.000

1. PV10 = 10 2. PV10 = 10 3. PV10 = 10
( 1 + 0.06) ( 1 + 0.09) ( 1 + 0.12)
PV10 = $ 558.395 PV10 = $ 422.411 PV10 = $ 321.973
b. Rework part a under the assumption that the $1,000,000 payment will be received in 15 rather
than 10 years.

$ 1.000.000 $ 1.000.000 $ 1.000.000

1. PV10 = 15 2. PV10 = 15 3. PV10 = 15
( 1 + 0.06) ( 1 + 0.09) ( 1 + 0.12)
PV10 = $ 417.265 PV10 = $ 274.538 PV10 = $ 182.696

c. On the basis of your findings in parts a and b, discuss the effect of both the size of the rate of
return and the time until receipt of payment on the present value of a future sum.

A Future Value $ 1.000.000 $ 1.000.000 $ 1.000.000

Annual Rate of Interest 6% 9% 12 %
Number of Years 10 10 10
Present Value ($558.395) ($422.411) ($321.973)
B Future Value $ 1.000.000 $ 1.000.000 $ 1.000.000
Annual Rate of Interest 6% 9% 12 %
Number of Years 15 15 15
Present Value ($417.265) ($274.538) ($182.696)

As the discount rate increases, the present value will be reduced. This decrease is due to the higher
opportunity costs associated with the higher rate. Also, the longer the time before the lottery payout is
collected, the less the current value due to the longer time the opportunity cost applies. In other words,
the larger the discount rate and the longer the time until the money is received, the smaller will be the
present value of a future payment.
P5–21 Time value: Annuities Marian Kirk wishes to select the better of two 10-year annuities, C and D.
Annuity C is an ordinary annuity of $2,500 per year for 10 years. Annuity D is an annuity due of $2,200
per year for 10 years.
a. Find the future value of both annuities at the end of year 10 assuming that Marian can earn (1) 10%
annual interest and (2) 20% annual interest.

1
𝐹𝑉(𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦) = 𝐶𝐹 ∗ ((1 + 𝑟)𝑛 − 1)
𝑟
1
𝐹𝑉(𝑎𝑛𝑛𝑢𝑖𝑡𝑦 𝑑𝑢𝑒) = 𝐶𝐹 ∗ ((1 + 𝑟)𝑛 − 1) + (1 + 𝑟)
𝑟
Ordinary Annuity Annuity Due

[(1+0,1)10 −1] [(1+0,1)10 −1]

1. 2500 x 0,1
= $ 39.843,56 3. 2200 x 0,1
x (1 + 0,1) = $ 38.568,57
[(1+0,1)10 −1] [(1+0,1)10 −1]
2. 2500 x 0,2
= $ 64.896,71 4. 2200 x 0,2
x (1 + 0,2) = $ 68.530,92

b. Use your findings in part a to indicate which annuity has the greater future value at the end of
year 10 for both the (1) 10% and (2) 20% interest rates.
We can see that the Annuity C ($39,843.56) has a higher value in 10 years and a 10%
premium relative to Annuity D ($38,568.57). On the other hand, when the rate increases to 20%
and the number of years used is still the same, Annuity D ($68,530.93) has a higher value relative
to Annuity C ($64,896.71).
c. Find the present value of both annuities, assuming that Marian can earn (1) 10% annual interest
and (2) 20% annual interest.

2500 1
1. ( 0.1
) x (1 − (1+0.1)10 ) = $ 15.361,42

2500 1
2. ( 0.2
) x (1 − (1+0.2)10 ) = $ 10.481,18

2500 1
3. ( ) x (1 − (1+0.1)10 ) x (+1 + 0.1)= $ 14.869,85
0.1
2500 1
4. ( ) x (1 − (1+0.2)10 ) x (+1 + 0.2)= $ 11.068,13
0.2

d. Use your findings in part c to indicate which annuity has the greater present value for both (1)
10% and (2) 20% interest rates.
From the point c we can see that the present value of the interest rate 10% has greater value
than the 20 % interest rate. The Annuity C, the 10% annual interest has $ 15.361 and the 20%
annual interest only $ 10.481. Otherwise Annuity D, the 10 % annual interest get the value $ 14.869
and the 20% has $ 11.068.
e. Briefly compare, contrast, and explain any differences between your findings using the 10% and
20% interest rates in parts b and d.
When the rate is 10%, Annuity C has greater PV & FV value rather than Annuity D. But
when the rate increases to 20%, Annuity D has greater PV & FV value rather than annuity D.