chapter 2: basic principles & fundamentals of good ...chapter 2: basic principles &...

Chapter 2: Basic Principles & Fundamentals of Good Financial Management

Ibrahim Sameer Diploma in Public Administration & Management (FM – CSTI) 1

Financial Management

Diploma in Public Administration &

Management – Notes & Tutorial

Questions

Chapter 5: Capital Planning



Question 1

Project X has the following cash flows:

Year Cash flow

$

0 105,000

1 25,000

2 35,000

3 35,000

4 40,000

5 50,000

What is project X’s payback period?

Question 2

A bank adds interest monthly to investor’s a/c even though interest rates are expressed in annual

terms. The current rate of interest is 12%. Fred deposits $2,000 on 1st July. How much interest

will have been earned by 31st December (to the nearest $)?

Question 3

A project would involve a capital outlay of $24,000. Profits (before depreciation) each year

would be $5,000 for six years. The cost of capital is 12%. Is the project worthwhile?



Question 4

Suppose that a project would cost $20,000 and the annual net cash inflows are expected to be as

follows. What is the IRR of the project?

Year Cash flow

$

1 8,000

2 10,000

3 6,000

4 4,000

Question 5

A building society adds interest monthly to investors’ accounts even though interest rates are

expressed in annual terms. The current rate of interest is 7% per annum.

An investors deposits $1,500 on 1st January. How much interest will have been earned by 30th

June?

Question 6

A project requiring an investment of $1,200 is expected to generate returns of $400 in year 1 & 2

and $350 in year 3 & 4. If the NPV = $22 at 9% and the NPV = -$4 at 10%, what is the IRR for

the project?



Question 7

A machine has an investment cost of $75,000 at time 0. The present values (at time 0) of the

expected net cash inflows from the machine over its useful life are:

Discount rate Present value of cash inflows ($)

10% 74,900

15% 67,700

20% 42,400

What is the IRR of the machine investment?

Question 8

A building society adds interest monthly to investors' accounts even though interest rates are

expressed in annual terms. The current rate of interest is 6% per annum. An investor deposits

$1,000 on 1 January. How much interest will have been earned by 30 June?

Refer kit Q19.1

Question 9

A one-year investment yields a return of 15%. The cash returned from the investment, including

principal and interest, is $2,070. Calculate the interest.



Question 10

A project requiring an investment of $1,200 Is expected to generate returns of $400 in years 1 and

2 and $350 in years 3 and 4. If the NPV = $22 at 9% and the NPV = -$4 at 10%, what is the IRR

for the project?

Question 11

A sum of money was invested for 10 years at 7% per annum and is now worth $2,000. The original

amount invested (to the nearest $) was how much?

Question 12



Question 13

Roza deposits MVR100 in the savings account at Bank of Maldives with an interest rate of 5% per

year for 5 years. How much would Roza have in the savings account at the end of the 5 year

period?

Question 14

Assume that Seema deposits MVR5,000 in the savings account at Bank of Cylon at the interest

rate of 10% per year for 2 years. How much would Seema have in the savings account at the end

of the second year?

Question 15

1. Assume that you keep MVR5,555 in the savings account at Bank of Maldives with an interest

rate of 15% per year for 5 years. How much potential will you obtain at the end of the 5 year

period?

2. If you keep MVR4,321 in the savings account at State Bank of India with an interest rate of 7%

per year for 2 years, how much will you obtain at the end of the 2 years period?

Question 16

You want MVR1,100 in your account a year from now. How much investment must you make

now if the interest rate offered by the bank is 10%?



Question 17

Ahmedbey company private limited, offers a low risk security that promises a payment of

MVR3,000 at the end of 2 years period with an offer of 15% interest rate per year. What is the

present value for MVR3,000?

Question 18

1. Assume that you are given the opportunity to purchase a low risk security that promised a

payment of MVR127.63 at the end of 5 years with an interest rate of 5% per year. How much is

the present value for MVR 127.63?

2. You plan to accumulate MVR6,213 in a bank savings account 5 years from now. How much

savings must you deposit now if the interest rate offered by the bank is 12% per year?

Question 19

Question 20

Question 21



Question 22

If you wish to accumulate MVR140,000 in 13 years, how much must you deposit today in an

account that pays an annual interest rate of 14%?

Question 23

What will MVR247,000 grow to be in 9 years if it is invested today in an account with an annual

interest rate of 11%?

Question 24

What will a deposit of MVR4,500 at 7% annual interest be worth if left in the bank for nine years?

Question 25

How much will MVR1,000 deposited in a savings account earning an annual interest rate of 6

percent be worth at the end of 5 years?

Question 26

How much will MVR1,000 deposited in a savings account earning a compound annual interest

rate of 6 percent be worth at the end of 3 years?



Question 27

You are considering the following two projects:

Project A

Requires an initial investment of MVR250,000 and this project will generate cash inflow of

MVR100,000 at the end of the second and third year and MVR150,000 at the end of the fourth

year.

Project B

Requires an initial investment of MVR400,000 and this project will produce cash inflow of

MVR125,000 every year for five years.

Based on the PBP technique, should these projects be accepted if the targeted payback period is 3

years?



Question 28



Question 29



Question 30



Question 31



Question 32

Question 33

A firm is considering investing in a project with the following cash flows:

Year 1 2 3 4 5 6 7 8

Net cash

flow ($) 2,000 3,000 4,000 3,500 3,000 2,000 1,000 1,000

The project requires an initial investment of $12,500, and the firm has a required rate of

return of 10 percent. Compute the payback, and net present value, and determine whether the

project should be accepted.

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