Present Value – Page 3

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

FM – Nov 2020 – L2 – Q3a – DCF: Specific applications | Discounted cash flow

Calculate the present value of payments under cash and credit purchase options, and recommend the better option.

Question

The directors of PDS Foods Ltd (PDS) are considering two payment options for the purchase of a new cereal processing plant:

Option 1: Cash purchase option
This option requires immediate payment of the full price of the plant. If PDS chooses this option, it will pay the cash price of GH¢800,379 today. PDS plans to raise the required amount by borrowing from a bank. Conso Bank Ghana has offered to lend the cash price to PDS at an annual interest rate of 15% with monthly compounding. The loan, interest, and other charges are to be amortized by even instalments of GH¢27,952.26 each made at the end of each month over the next three years.

Option 2: Credit purchase plan
Under this option, the vendor requires an immediate down payment followed by a series of even payments. If PDS chooses this option, it will be required to pay GH¢50,000 today. This will be followed by the payment of GH¢116,100 at the end of each quarter over the next two years. The interest rate implicit in this credit purchase plan is 20% per annum.

Required:

i) Find the present value of all the payments under the cash purchase option. (5 marks)
ii) Find the present value of all the payments under the credit purchase option. (4 marks)
iii) Which of the two options do you recommend to the company? Explain. (1 mark)

Answer

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Tags: Decision Making, Discounted Cash Flow, Loan amortization, Present Value
Level: Level 2

Topic: DCF: Specific applications, Discounted cash flow
Series: NOV 2020

FM – Nov 2023 – L2 – Q3 – Introduction to Investment Appraisal

Evaluate the best pay-out option for a life insurance policy, compute the annual deposit for a sinking fund, and calculate the outcome of a money market hedge.

Question

a) Eleven years ago, Mr. and Mrs. Akolgo signed onto a joint life insurance policy, which pays out benefits to the surviving spouse when one of them dies. Mrs. Akolgo died a couple of months ago, and Mr. Akolgo has applied for the payment of benefits due him.
He has been presented with three pay-out options to choose from:
Option A: A lump sum payment of GH¢400,000 now.
Option B: A payment of GH¢100,000 now plus quarterly payments of GH¢22,000 at the end of each quarter over the next ten years.
Option C: A monthly payment of GH¢10,000 for life.
The average interest rate in the economy is 25 % per annum.

Required:
Using relevant computations, recommend to Mr. Akolgo the best pay-out option. (6 marks)

b) Gaazie Mining Company (Gaazie) borrows GH¢5 million at a compound interest rate of 28% per annum for five years. Per the terms of the loan agreement, Gaazie will pay interest on the loan monthly over the life of the loan and then make a bullet payment for the principal of the loan at the end of five years.
The managers of the company have decided to deposit equal annual amounts in an interest-bearing savings account to raise money to pay off the loan principal in five years’ time. Interest on the deposits will be paid at a compound rate of 15% per annum.

Required:
Compute the annual deposit Gaazie needs to pay into the savings account. (4 marks)

c) Tofiakwa Ltd is expecting the following in six months’ time:
Receipt: US$700,000
Payment: US$1,200,000
The spot exchange rate between the Ghanaian cedi and the U.S. dollar is currently GH¢11.1255(buy) – GH¢11.5581(sell) to US$1. The cedi-dollar exchange rate has been volatile in recent times, hence the managers of the company have decided to manage the company’s U.S. dollar exposure using a money market hedge.

The following data has been gathered from the Ghanaian and the U.S. money markets:

6-month interest rates	Borrowing	Investing
U.S. dollar	10.00%	8.00%
Ghanaian cedi	25.00%	18.00%

Required:
i) Set up or construct the money market hedge for the currency exposure. (3 marks)
ii) Calculate the net outcome of the hedge. (7 marks)

Answer

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Tags: Life insurance policy, Money market hedge, Present Value, Sinking Fund
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: NOV 2023

FM – MAR 2024 – L2 – Q3 – Foreign exchange risk and currency risk management

Involves calculating the quarterly payment and total interest on a mortgage loan, evaluating an alternative payment plan, and explaining and applying currency risk management techniques using forward contracts.

Question

a) Onana Events Company (Onana) is purchasing a building from a real estate company. The current cash price of the building is GH¢2,500,000. Onana can obtain a GH¢2,500,000 mortgage loan to finance the payment of the cash price of the building. The loan bears a compound annual interest rate of 18% and calls for equal payments at the end of each quarter for 20 years.

Required:

i) Compute the quarterly payment.
(4 marks)

ii) Compute the total interest that will be paid by Onana to the mortgage company over the life of the loan.
(2 marks)

iii) Suppose the real estate company is offering a credit payment plan to Onana. Per the credit terms, Onana will have to pay GH¢500,000 now and then pay GH¢110,000 at the end of each month for one year. The implicit interest rate is 20% per annum. Compute the aggregate present value of the payments under this option.
(4 marks)

b) Sempe Ghana Plc needs to have EUR650,000 in two months’ time to settle a trade payable. The management team fears that the cedi would depreciate against the euro in the coming months. The team is however divided over whether the currency risk exposure should be hedged using a forward foreign exchange contract or a futures foreign exchange contract. The following quotations have been obtained from Ghana’s foreign exchange market:

FX Quotation	Bid Rate	Ask (Offer) Rate
Spot Rate	GH¢12.1854/EUR1	GH¢12.4854/EUR1
2-month Forward Rate	GH¢12.5854/EUR1	GH¢12.8854/EUR1

Required:

i) Explain to the management of Sempe Ghana Ltd whether the foreign exchange quotations provided above are direct quotations or indirect quotations.
(5 marks)

ii) Suppose the company uses the forward contract to hedge its currency exposure. Compute the outcome of the forward contract hedge.
(5 marks)

Answer

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Tags: Compound Interest, Currency risk, Forward Contracts, Mortgage Loan, Present Value
Level: Level 2

Topic: Foreign exchange risk and currency risk management
Series: MAR 2024

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.

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.

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.

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

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

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

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

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.

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

Understanding when a business venture is considered worthwhile.

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

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

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%.

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

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

FM – Nov 2020 – L2 – Q3a – DCF: Specific applications | Discounted cash flow

Calculate the present value of payments under cash and credit purchase options, and recommend the better option.

FM – Nov 2023 – L2 – Q3 – Introduction to Investment Appraisal

Evaluate the best pay-out option for a life insurance policy, compute the annual deposit for a sinking fund, and calculate the outcome of a money market hedge.

FM – MAR 2024 – L2 – Q3 – Foreign exchange risk and currency risk management

Involves calculating the quarterly payment and total interest on a mortgage loan, evaluating an alternative payment plan, and explaining and applying currency risk management techniques using forward contracts.

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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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FM – Nov 2020 – L2 – Q3a – DCF: Specific applications | Discounted cash flow

Calculate the present value of payments under cash and credit purchase options, and recommend the better option.

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FM – Nov 2023 – L2 – Q3 – Introduction to Investment Appraisal

Evaluate the best pay-out option for a life insurance policy, compute the annual deposit for a sinking fund, and calculate the outcome of a money market hedge.

You're reporting an error for "FM – Nov 2023 – L2 – Q3 – Introduction to Investment Appraisal"

FM – MAR 2024 – L2 – Q3 – Foreign exchange risk and currency risk management

Involves calculating the quarterly payment and total interest on a mortgage loan, evaluating an alternative payment plan, and explaining and applying currency risk management techniques using forward contracts.

You're reporting an error for "FM – MAR 2024 – L2 – Q3 – Foreign exchange risk and currency risk management"

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