Question 1 20marks JD recently graduated from Damelin and is currently doing his internship. He wants to buy a Golf TDi (or similar) in five years’ time. The vehicle is currently valued at R280,000 but with inflationary expectations at 6% he expects the vehicle to cost somewhat more when he purchases the vehicle. He wants to put down a deposit of 35% at purchase date and intends putting money aside towards the deposit. A bank is willing to offer him 8% pa compounded monthly on any savings. He expects that ABSA Vehicle Finance to offer him favourable terms of 11.5% pa compounded monthly over five years to cover his repayments.

Question 1 20marks

JD recently graduated from Damelin and is currently doing his internship. He wants to buy a Golf TDi (or similar) in five years’ time. The vehicle is currently valued at R280,000 but with inflationary expectations at 6% he expects the vehicle to cost somewhat more when he purchases the vehicle. He wants to put down a deposit of 35% at purchase date and intends putting money aside towards the deposit. A bank is willing to offer him 8% pa compounded monthly on any savings. He expects that ABSA Vehicle Finance to offer him favourable terms of 11.5% pa compounded monthly over five years to cover his repayments.

Required:

1) What amount does he expect to put aside each month to pay off the deposit?

2) What would his expected repayments be to pay off the loan?

Question 2 20marks

While vacationing in Knysna, John Kelley saw the vacation home of his dreams. It was listed with a sale price of R200,000. The only catch is that John is 40 years old and plans to continue working until he is 65. Still he believes that prices generally increase at the overall rate of inflation. John believes that he can earn 9% annually after taxes on his investments. He is willing to invest a fixed amount at the end of each of the next 25 years to fund the cash purchase of such a house.

Required:

1) Inflation is expected to average 5% per year for the next 25 years. What will John’s dream house cost when he retires?

2) How much must John invest at the end of each of the next 25 years to be able to make the cash payment at retirement?

3) What if he invests at beginning of the period instead of end of period, would there be any differences in values?

Question 3 20marks

In exchange for a R20,000 payment today, a well-known company will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 11%

Alternative Single amount

A R28,500 at end of 3 years

B R54,000 at end of 9 years

C R160,000 at end of 20 years

Required:

1) Find the value today of each alternative.

2) Are all the alternatives acceptable – i.e. worth R20,000 today?

3) Which alternative, if any, will you take?

Question 4 40marks

A firm wishes to undertake any or all of the below project. The firm’s required rate of return is 12 percent and the projected cash flow for each project is given below.

Projects

Year

Zeta

Omega

0

-R100 000

-R90 000

1

R35 000

R40 000

2

R25 000

R35 000

3

R15 000

-R10 000

4

R20 000

R15 000

5

R15 000

R12 000

6

R5 000

R15 000

As a Finance Manager in the making, what would you advise the firm with regard to these projects? Please provide your advice by responding to the following questions

1) For each project, compute the

i. Discounted Payback Period (DPBP)

ii. Profitability Index (PI)

iii. Net Present Value (NPV)

iv. Internal Rate of Return

2) Based on your understanding of the uses of the above techniques, which of them provides the most valuable outcome for decision making.

3) Given the results of your choice in “B” Which project should be undertaken if both are mutually independent and which should be undertaken if both are mutually exclusive? Explain why.

4) Suppose that a different firm also evaluates Project Zeta. If its required rate of return is 15 percent, should this firm purchase the project? No computations are needed to answer this question