Page 127 - Microsoft Word - 00 BA3 IW Prelims STUDENT.docx

Discounting and investment appraisal

Question 15

Terminal values

Calculate the terminal value in 5 years’ time of a series of 6 receipts of $5,000
received a year apart starting today if the interest rate is 4%.

3
2
4
5
TV = $5,000 × 1.04 + $5,000 × 1.04 + $5,000 × 1.04 + $5,000 × 1.04

+ $5,000 × 1.04 + $5,000 = $33,165

Question 16

Sinking funds

Calculate the amount needed to set aside each year in a sinking fund to provide
$11,500 in 4 years’ time if the first amount is set aside today and interest of 7%
is earned per annum on the set aside funds.

2
3
4
TV = $11,500 = ? × 1.07 + ? × 1.07 + ? × 1.07 + ? × 1.07 + ?
3
2
4
$11,500 = ? (1.07 + 1.07 + 1.07 + 1.07 + 1)
$11,500 = ? × 5.7507
? = $11,500/5.7507 = $2,000

Illustrations and further practice

Now read illustrations 10 and 11 and try TYU 20 from Chapter 7.

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