Tutorial 3 RQ

You plan to buy a house in 5 years. You expect to need $60,000 as a deposit for your mortgage then. Assuming the interest rate of 5.5% per annum, how much would you need to invest today?

• $78,417.60

• $45,908.06

• $14,050.59

• $10,750.59

Answer explanation

How much we need to set aside today to have it grow to $60,000 in 5 years?

PV = 60,000/(1.055)⁵=$45,908.06

You are 50 years old and plan to retire when you are 65 years old. You would like to contribute $30,000 per year to your superannuation funds for the next 15 years. What will be the value of your contributions when you retire assuming the annual return of 9%?

• $109,274.50

• $241,820.7

• $450,000

• $880,827.50

Answer explanation

How much will you have accumulated if you set aside $30,000 per year for the next 15 years?

FVA=30,000/0.09[(1.09)¹⁵-1] =$880,827.50

Your brother has won a lottery. He has promised an annual allowance of $20,000 for 10 years to help with your finance. The first allowance is expected to start in 3 years time. What is the value of expected cash flows today assuming the interest rate of 5% per annum?

• $154,434.7

• $140,076.80

• $133,406.50

• $200,000

Answer explanation

Step 1: Discount cash flows from Y3-Y12 (a total of 10 CFs) back to the end of Year 2 using PVA formula.

PVA₂= 20,000/0.05[1-1/(1.05)¹⁰] =154,434.7

Step 2: Discount PV₂ of 154,434,7 back to Y0 using PV formula.

PV=154,434.7/(1.05)²=140,076.8