BFW 2631

FINANCIAL MANAGEMENT

TUTORIAL SET 2 WEEK 2 SOLUTIONS

FINANCIAL MATHEMATICS
Important note to students: It is your responsibility to familiarize yourself with your own
personal calculator. Teaching staff are familiar with the Sharp EL735 and Sharp EL738
Business Financial Calculator. Assistance will be provided with the Sharp EL735/EL738
calculator in teaching materials. If you are using any other model then you must learn how to
use them yourself. Do not leave learning the calculator until the last minute. You are also
required to attempt all tutorial questions on your own prior to attending class.
Question One
At 6 percent interest, how long does it take to
a. double your money?
b. quadruple it?
Solution

(a) Using the 72 Rule the time to double an investment at an interest rate of 6% is
approximately = 72/6=12 years
0

i=6%

12

i=6%

24

(b)
X

2X

4X

So it should take approximately 24 years for an investment to quadruple at an interest rate

of 6%
Alternatively

ln( 2)
11.8956
ln(1.06)
(a) 2X= X(1+i)n n=

=12 years

ln( 2)
11.8956
ln(1.06)
(b) 4X= 2X(1+i)n n=
=12 years
Total time taken for X to amount to 4X is approximately 24 years

Question Two
a. You are offered an investment that requires you to put up $3,000 today in exchange for
$10,000 in 15 years from now. What is the annual rate of return on this investment?
b. A bank offers you an interest of 8%, compounded quarterly. Which investment will you
choose (take the investment opportunity in part (a) or invest at this bank)?
Solution

2(a)

Annual rate of return =

FV
i
PV

1/ n

$10,000
1

$3,000

(1 / 15)

=0.0836 or 8.36%

Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]
Values
15
3000 []
10000
[COMP]

Function Keys
[N]
[PV]
[FV]
[I/y]

1
2(b)

0.08
4

Display on Calculator Screen

8.36

1 8.24%

Effective Annual Rate =

Choose the Investment in part (a) since the Annual Rate of return of 8.36% from the investment in
part (a) > Banks EAR =8.24%

Question Three
An investor deposits $10,000. Ten years later it is worth $17,910. What rate of return did the
investor earn on the investment?
Solution:
$17,910 = $10,000 x (1+i)10
(1+i)10 = $17,910/10,000 = 1.7910
(1+i) = (1.7910) 1/10 = 1.060
i = .060 = 6.0%
Using Calculator
PV=$10000 FV=$17910 N=10 COMP [I/Y] DISPLAY 6
Question 4
Today your stock is worth $50,000. You invested $5,000 in the stock 18 years ago. What average
annual rate of return [i] did you earn on your investment?
Solution:
$50,000 = $5,000 x (1+i)18
(1+i)18 = $50,000/$5,000 = 10
(1+i) = (10) 1/18 = 1.135

i = 0.13646 or 13.65%
Using Calculator
PV=$5000
FV=$50000 N=18 COMP [I/Y] DISPLAY 13.65%
Question Five
Suppose you make an investment of $1,000. The first year, the investment returns 12%, the second year it
returns 6%, and the third year it returns 8%. How much would this investment be worth, assuming no
withdrawals are made?
Solution
0

YR1 1 YR2 2 YR3

I=12% i=6%
i=8%

10001.12 x (1.06) x (1.08) =$1,282

Question Six
As a financial manager, you have to decide whether or not to undertake a project, which involves an
initial cost or cash outflow of $1,000 and yields the following expected cash inflows.
End of Year
Cash Flow($)
1
300
2
600
3
900
a. Illustrate the cash flows as they arise on a time line.
b. What is the implied rate of return on this project?
c. If your companys cost of funds is 8%, would you undertake the project based on the net present
value of the above cash flows?
Solution
6(a)
0
1
2
3

-$1000

$300

$600

$900

6(b) Using Calculator

1000 [ENT], 300[ENT], 600[ENT], 900[ENT], [2ndF] [CFi] [COMP]
i=29.728%
6(c)

0
($1,000)
$300
(1.08)

277.78 =

$300

$600

$900

$600
(1.08) 2

514.40 =
$900
(1.08) 3

714.45=
$506.63 > 0
Alternatively Using the Sharp EL735/EL738 Business / Financial Calculator
Clear the memory before any operation [2ndF] then [ALPHA] then [0] then [0]
Time Period
0

Cash Flow
$1000

$300

Function Keys

[ENT]
[ENT]

Display on Calculator Screen

DATA SET: CF
0.00

DATA SET: CF
1.00
2
$600
[ENT]
DATA SET: CF
2.00
3
$900
[ENT]
DATA SET: CF
3.00
[2ndF] [CFi]
RATE(I/Y)=
0.00
8 [ENT]
RATE(I/Y)=
8.00
[]
NET_PV=
0.00
[COMP]
506.63
Since NPV =$506.63 > 0 The project adds value to the firm and hence is worth undertaking.