Question Tag: Present Value

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FM – May 2016 – L3 – Q7 – Financing Decisions and Capital Markets

Comparing the cost of financing equipment replacement through an outright purchase funded by a loan versus a finance lease.

Question

MK Plc is considering the best way to finance the replacement for a particular high specification piece of equipment that has become too costly to maintain. The replacement equipment is estimated to have a useful life of 4 years with no residual value after that time.

Two alternative financing schemes are being evaluated:

Scheme A: Buy the equipment outright funded by a bank loan
Scheme B: Enter into a four-year finance lease

Scheme A: Buy outright, funded by a bank loan
MK Plc could purchase the equipment outright at a cost of N200 million on July 1, 2016. MK Plc can normally borrow at an annual interest rate of 13% per year.

Scheme B: Four-year finance lease
The equipment would be delivered on July 1, 2016, and MK Plc would pay a fixed amount of N58,790,000 each year in advance, starting on July 1, 2016, for four years. At the end of four years, ownership of the equipment will pass to MK Plc without further payment.

Other Information:

MK Plc has a cost of equity of 20% and WACC of 16%
MK Plc is liable to company tax at a marginal rate of 30%, which is settled at the end of the year in which it arises
Tax depreciation allowances on the full capital cost are available in equal instalments over the first four years of operation

You are required to:

a.

Calculate which payment method is expected to be cheaper for MK Plc and recommend which should be chosen solely on the present value of the two alternatives as at July 1, 2016. (13 Marks)

b.

Discuss the appropriateness of the discount rate used in (a). (2 Marks)

Answer

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Tags: Discount rate, Equipment Financing, Financing, Lease, Loan, Present Value
Level: Level 3

Topic: Financing Decisions and Capital Markets

BMF – Nov 2020 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets

Calculate the present value of N12,000 received in one year at a 5% time preference rate.

Question

Assuming a 5% time preference rate, what is the present value of N12,000 received one year from now?
A. N11,428.80
B. N11,539.90
C. N12,428.80
D. N12,539.90
E. N13,528.80

Answer

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Tags: Financial Calculations, Present Value, Time Preference Rate
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

BMF – Nov 2020 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets

Calculate the present value needed to reach a lump sum in 5 years with compound interest.

Question

Lokoson must pay a lump sum of N960,000 in 5 years. What amount deposited today at 5.8% compounded annually will make up the sum of money?
A. N724,200.36
B. N724,300.37
C. N725,200.36
D. N725,300.37
E. N725,300.37

Answer

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Tags: Compound Interest, Lump Sum, Present Value, Time value of money
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2020

FR – NOV 2016 – L2 – Q6b – Leases (IFRS 16)

Calculation of present value of lease payments and determination of lease type for equipment leasing arrangement.

Question

Ijaw Oil Plc has entered into agreement to lease a plant and equipment from Ogoni Leasing Company Limited. The lease period of the plant and equipment is six (6) years. The agreement provides that Ogoni Leasing Company Limited will incur upkeep expenses. The cost of the plant and equipment is N900,000,000,000. The economic useful life is 20 years. Ijaw Oil Plc is to pay annual lease rentals of N150,000,000 in advance over 6 years after which the plant and equipment revert to the lessor. The implicit interest rate is 22% per annum which is stated below:

Year	0	1	2	3	4	5	6
PV(N1)	1.0000	0.8197	0.6719	0.5507	0.4514	0.3700	0.3033

You are required to:

i. Calculate the present value of the lease rental of the equipment. (4 Marks)

ii. Identify with justification the kind of lease involved (3 Marks)

iii. Advise on how to treat the lease rentals paid by Ijaw Oil Plc. in the financial statements (1 Mark)

Answer

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Tags: Lease Classification, Lease Payments, Lease Treatment, Lease Type, Present Value
Level: Level 2

Topic: Leases
Series: NOV 2016

QTB – May 2017 – L1 – SB – Q3a – Mathematics

Determine the annual savings required to accumulate a future sum under annuity terms.

Question

A lawyer plans to save a certain amount of money per annum for 5 years on the first day of the year. If the interest rate is 8%, for him to receive N696,910.50, determine x. (10 Marks)

Answer

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Tags: Annuity, Interest Rate, Present Value, Savings
Level: Level 1

Topic: Mathematics
Series: MAY 2017

QTB – Nov 2015 – L1 – SA – Q18 – Mathematics of Business Finance

This question identifies the term used to describe the process of calculating present value from future value.

Question

The term used to describe the process of working backwards in time to find the present value from the future value of an investment is known as:

A. Discount
B. Discounting
C. Discount Rate
D. Annuity
E. Amortization

Answer

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Tags: Discounting, Present Value, Time value of money
Level: Level 1

Topic: Mathematics of Business Finance
Series: NOV 2015

QTB – May 2015 – L1 – SA – Q4 – Operations Research

Understanding when a business venture is considered worthwhile.

Question

A business venture is considered as worthwhile when the:

A. Present value of revenue is positive
B. Present value of the cost is positive
C. Net present value is positive
D. Net present value is equal to zero
E. Internal rate of return is positive

Answer

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Tags: Internal Rate of Return, Net Present Value, Present Value
Level: Level 1

Topic: Operations Research
Series: MAY 2015

QTB – May 2015 – L1 – SA – Q1 – Mathematics

Calculating how long it takes for N500 to appreciate to N10,000 at 5% continuous interest.

Question

The present value of NA to be paid in t years in the future (assuming 5% continuous interest rate) is P (A, t) = Ae^0.05t. How long will it take N500 to appreciate to N10,000?

A. 5.99 years
B. 26.00 years
C. 52.00 years
D. 59.91 years
E. 599.10 years

Answer

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Tags: Continuous Interest, Present Value, Time value of money
Level: Level 1

Topic: Mathematics
Series: MAY 2015

BMF – May 2021 – L1 – SA – Q17 – Investment Decisions

Calculates the present value of N120,000 received two years from now at a time preference rate of 6.5%.

Question

Assuming a 6.5% time preference rate, what is the present value of N120,000 received two years from now?
A. ₦104,799.11
B. ₦105,799.11
C. ₦106,799.11
D. ₦107,799.11
E. ₦108,799.11

Answer

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Tags: Financial Calculations, Present Value, Time value of money
Level: Level 1

Topic: Investment Decisions
Series: MAY 2021

BMF – Nov 2023 – L1 – SA – Q5 – Investment Decisions

Calculate the present value of a future amount discounted at 12%.

Question

Calculate the present value, discounted at 12 percent, of receiving N300,000 at the end of year 6.

A. 151,989.34
B. 162,999.34
C. 173,989.34
D. 184,989.34
E. 195,989.34

Answer

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Tags: Discounting, Present Value, Time value of money
Level: Level 1

Topic: Investment Decisions
Series: NOV 2023

BMF – Nov 2019 – L1 – SA – Q17 – Basics of Business Finance and Financial Markets-

Calculating the present value of a future amount with a given time preference rate

Question

Assuming a 5% time preference rate, what is the present value of ₦12,000 received at the end of 15 years?
A. ₦3,772.00
B. ₦4,772.00
C. ₦5,772.00
D. ₦6,772.00
E. ₦7,772.00

Answer

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Tags: Present Value, Time value of money
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2019

BMF – Nov 2019 – L1 – SA – Q13 – Basics of Business Finance and Financial Markets

Calculating the present value of a future amount with compounded interest

Question

What is the present value of N10 million in 8 years, if money could be deposited at 6.5% compounded quarterly?
A. N15.73 million
B. N16.75 million
C. N17.73 million
D. N18.75 million
E. N19.46 million

Answer

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Tags: Compound Interest, Present Value
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: NOV 2019

FR – Nov 2023 – L2 – Q2b – Financial Reporting Standards and Their Applications

Explain the financial reporting treatment of a lease transaction for Fugu Ltd in accordance with IFRS 16.

Question

Fugu Ltd (Fugu) operates in the automobile industry. The following transaction relates to Fugu for the year-end 31 July 2023: On August 1, 2022, Fugu entered into a ten-year lease, agreeing to pay GH¢3 million annually in arrears in exchange for the use of a building. The present value of the minimum lease payments was GH¢20.13 million at 1 August 2022, and the useful economic life of the building was 50 years. Fugu’s cost of capital is 8%.

Required:
In accordance with IFRS 16: Leases, show the financial reporting treatment of the above transactions in the financial statements of Fugu for the year ended 31 July 2023.

Answer

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Tags: Financial Reporting Treatment, IFRS 16, Leases, Present Value, Right-of-Use Asset

Topic: Financial Reporting Standards and Their Applications, Leases
Series: NOV 2023

BM – May 2024 – L1 – SA – Q17 – Basics of Business Finance and Financial Markets

Calculating the present value of receiving a fixed amount of money discounted at a specific rate.

Question

Calculate the present value, discounted at 15 percent, of receiving ₦500,000 at the end of year 4.
A. ₦245,836.22
B. ₦255,846.32
C. ₦265,856.42
D. ₦275,866.52
E. ₦285,876.62

Answer

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Tags: Discounting, Investment decisions, Present Value
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAY 2024

QT – Nov 2017 – L1 – Q7a – Mathematics of Business Finance

Determine the timeline for savings and calculate the time required to reach a target amount with compound interest.

Question

Every Monday, Kwei puts GH¢30 into a savings account at the Ring Bank, which accrues interest of 6.92% per annum compounded weekly.

Required:
i) Draw a cash flow timeline showing the payments, the interest rate, and the present values for the first four payments. (3 marks)
ii) Determine how long it will take Kwei’s account to reach a balance of GH¢4,397.53. Convert your answer into the number of years and days to the nearest integer. (6 marks)
iii) Determine how much interest Kwei will receive from the bank during the period of his investment.

Answer

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Tags: Compound Interest, Present Value, Savings
Level: Level 1

Topic: Mathematics of Business Finance
Series: NOV 2017

QT – May 2017 – L1 – Q2b – Mathematics of Business Finance

Determine the present value of future sums and identify the preferred business opportunity.

Question

A model for calculating the amount required, $A_{0}$ , to achieve a specified sum at some future point in time, $n$ years at a rate of interest , is given by:

Required:

i) Determine the present value of GH¢7000.00 payable in 4 years.
(7 marks)

ii) Determine the present value of GH¢8000.00 payable in 6 years.
(7 marks)

You are required to discount these future sums using an interest rate of 8%.

Answer

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Tags: Discounting, Present Value, Time value of money
Level: Level 1

Series: MAY 2017

QT – Nov 2018 – L1 – Q3b – Mathematics of Business Finance

Calculate the maximum loan Kasuli can borrow at 15% interest with monthly payments of GH¢1,400 over 20 years.

Question

Kasuli, a Marketing Executive who could not recover any amount out of his investment, decided to take a mortgage at an interest rate of 15% over a 20-year term. If his income is enough to enable him to pay GH¢1,400 per month, what is the maximum amount he can borrow? (10 marks)

Answer

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Tags: Interest Rate, Loan, Monthly Payments, Mortgage, Present Value
Level: Level 1

Topic: Mathematics of Business Finance
Series: NOV 2018

FR – May 2017 – L2 – Q5d – Conceptual Framework for Financial Reporting

Explain the four bases of measurement used in financial statements.

Question

The conceptual framework includes the measurement bases of the elements of the financial statements together with recognition criteria for them.

Required:
Explain the FOUR bases of measurement used in the financial statements.

Answer

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Tags: Current Cost, Financial Elements, Historical Cost, Measurement Bases, Present Value, Realisable Value
Level: Level 2

Topic: Conceptual Framework for Financial Reporting
Series: MAY 2017

QT – Nov 2018 – L1 – Q3a – Mathematics of Business Finance

Determine how much to invest at 6% per annum to earn an annual income of GH¢15,000 for 10 years.

Question

Kwabena was able to recover GH¢150,000 out of GH¢200,000 invested in the Savings and Loans Company. How much money should he invest at a return of 6% per annum so as to earn an annual income of GH¢15,000 for a period of 10 years? (10 marks)

Answer

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Tags: Annual Income, Discounting, Investment, Present Value
Level: Level 1

Topic: Mathematics of Business Finance
Series: NOV 2018

FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

Question

a) TekApps is a small technology company that develops financial technology (FinTech) applications for mobile devices. The company is selling one of its highly rated FinTech apps to a financial institution. The financial institution has proposed the following strategic payment options for TekApps’ consideration:

Strategy 1: An immediate payment of GH¢1.2 million followed by payments of GH¢50,000 at the end of each quarter during the next five years.

Strategy 2: Payment of GH¢55,000 at the beginning of each month for the next five years.

TekApps’ required rate of return is 25% per annum.

Required:
i) Identify the type of cash flow pattern described under each option. (3 marks)
ii) Compute the present value of the cash flows for each strategy and advise TekApps on the best payment option. (7 marks)

b) BKB Entertainment Ltd (BKB) currently borrows at an average rate of 24% per annum. The Treasury Manager of the company believes that BKB can borrow at a lower interest rate if its creditworthiness is assessed and rated by a rating agency. He has therefore recommended to the Board of Directors to consider requesting a credit rating.

Required:
i) Explain TWO (2) benefits of credit rating to BKB. (4 marks)
ii) Advise the directors on THREE (3) factors rating agencies will consider in determining the company’s credit rating. (6 marks)

Answer

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Tags: Annuity, Cash Flow Patterns, Financial Decision-Making, Payment Options, Present Value
Level: Level 2

Topic: Discounted cash flow, Sources of finance: debt, Working Capital Management
Series: DEC 2022

Question Tag: Present Value

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FM – May 2016 – L3 – Q7 – Financing Decisions and Capital Markets

Comparing the cost of financing equipment replacement through an outright purchase funded by a loan versus a finance lease.

a.

b.

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BMF – Nov 2020 – L1 – SA – Q16 – Basics of Business Finance and Financial Markets

Calculate the present value of N12,000 received in one year at a 5% time preference rate.

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BMF – Nov 2020 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets

Calculate the present value needed to reach a lump sum in 5 years with compound interest.

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FR – NOV 2016 – L2 – Q6b – Leases (IFRS 16)

Calculation of present value of lease payments and determination of lease type for equipment leasing arrangement.

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QTB – May 2017 – L1 – SB – Q3a – Mathematics

Determine the annual savings required to accumulate a future sum under annuity terms.

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QTB – Nov 2015 – L1 – SA – Q18 – Mathematics of Business Finance

This question identifies the term used to describe the process of calculating present value from future value.

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QTB – May 2015 – L1 – SA – Q4 – Operations Research

Understanding when a business venture is considered worthwhile.

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QTB – May 2015 – L1 – SA – Q1 – Mathematics

Calculating how long it takes for N500 to appreciate to N10,000 at 5% continuous interest.

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BMF – May 2021 – L1 – SA – Q17 – Investment Decisions

Calculates the present value of N120,000 received two years from now at a time preference rate of 6.5%.

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BMF – Nov 2023 – L1 – SA – Q5 – Investment Decisions

Calculate the present value of a future amount discounted at 12%.

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BMF – Nov 2019 – L1 – SA – Q17 – Basics of Business Finance and Financial Markets-

Calculating the present value of a future amount with a given time preference rate

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BMF – Nov 2019 – L1 – SA – Q13 – Basics of Business Finance and Financial Markets

Calculating the present value of a future amount with compounded interest

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FR – Nov 2023 – L2 – Q2b – Financial Reporting Standards and Their Applications

Explain the financial reporting treatment of a lease transaction for Fugu Ltd in accordance with IFRS 16.

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BM – May 2024 – L1 – SA – Q17 – Basics of Business Finance and Financial Markets

Calculating the present value of receiving a fixed amount of money discounted at a specific rate.

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QT – Nov 2017 – L1 – Q7a – Mathematics of Business Finance

Determine the timeline for savings and calculate the time required to reach a target amount with compound interest.

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QT – May 2017 – L1 – Q2b – Mathematics of Business Finance

Determine the present value of future sums and identify the preferred business opportunity.

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QT – Nov 2018 – L1 – Q3b – Mathematics of Business Finance

Calculate the maximum loan Kasuli can borrow at 15% interest with monthly payments of GH¢1,400 over 20 years.

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FR – May 2017 – L2 – Q5d – Conceptual Framework for Financial Reporting

Explain the four bases of measurement used in financial statements.

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QT – Nov 2018 – L1 – Q3a – Mathematics of Business Finance

Determine how much to invest at 6% per annum to earn an annual income of GH¢15,000 for 10 years.

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FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

You're reporting an error for "FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management"

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