BCO126 MATHEMATICS OF FINANCE Midterm

BCO126 MATHEMATICS OF FINANCE Midterm Task brief & rubrics

 

Task

General instructions:

1. Save this Word document in your computer and name your file: MIDTERM_xxxxxxx.docx (where xxxxxxx is your last name)

2. In this document write your explained answers on the lines.

3. Use a blank sheet of paper to hand-write your formulas and your workings to obtain the result for each question.

4. Include each question number and highlight each final result.

5. Take a picture of each page and attach them to this Word document.

6. Upload this word file to the Moodle link called “Midterm Submission point”.

Details of the task:

· This assignment must be performed individually

· Structure: 4 questions (25% weighting each)

· All questions must include workings and a reasoned answer, not just the final number.

 

Task content:

 

Read the following context;

 

We are planning to do some improvements in our business. We had been saving every month for the last years an amount that represents a total sum of savings of $80,000. In order to improve our operations and increase our revenues, we have some projects and investment alternatives that we are considering, having in mind the goal of expanding our business and opening a new store with an expected cost of $150,000.

 

 

 

 

 

 

 

 

Question 1

Considering that the banks are currently offering an average annual rate of 5%, calculate each of the following investment options and explain which is more attractive in order to be able to obtain the $150,000 that we need for our new store, based on those calculations. Please show your workings for each option.

 

a) Investing part of our savings in a product that offers an annual interest of 5% compounded quarterly for 10 years to produce $150,000.

 

b) Investing all our savings in a product that offers annual 5% simple interest for 10 years.

 

c) Investing all our savings in a project that will produce annual cashflows of $22,500 for 10 years.

 

Best option:

 

(25%)

Question 2

 

Choose one of these two projects, with the following conditions, that you could start using part of our savings in order to maximize them, considering that the current market rates are around a 2%:

 

Project 1: Investing $40,000 in a project that will produce cashflows of $16,800 per year for 5 years.

 

Project 2: Investing $50,000 in a project that will produce cashflows of $19,200 per year for 5 years.

 

Best option:

(25%)

Question 3

We also have been offered two alternative projects:

 

Project 1: A project that consists of an initial investment of $80,000 and a set of yearly revenues of $30,000 for 4 years.

Project 2: A project that consists of an initial investment of $60,000 and a set of yearly revenues of $25,000 for 4 years.

 

a) Which one has the shortest payback period comparing these projects?

b) Considering a cost of capital of 4%, what’s the NPV of the best option?

c) Which one would be the most preferable option?

 

Best option:

(25%)

 

Question 4

Calculate the following two options and indicate which of them would be more interesting. Please show your workings for each option.

 

a) Putting all our savings in an account for 3 years at an annual interest rate of 8% compounded quarterly, and investing the total savings at that time for 4 more years at a 10% compounded monthly.

 

b) Putting all our savings in an account for 4 years at an annual interest rate of 8,5% compounded semiannually, and investing the total savings at that time for 3 more years at a 12% compounded quarterly.

 

Best option:

(25%)

Formalities:

· Word count: max. 1500 words

· Font: Arial 12,5 pts.

· Text alignment: Justified.

· The formulas and procedures to obtain the result must be included.

 

Submission: Week 4 – Via Moodle (Turnitin)

Weight: This task is a 30% of your total grade for this subject.

 

It assesses the following learning outcomes:

· to understand the concept of time value of money

 

· to distinguish between simple and compound interest rates

 

· to understand the concept of rate of return of a project in finance

 

· to understand the concept of net present value and payback period

 

· to demonstrate an ability to apply the technical skills related to the course in a practical context