Question 1 -

JJ Industries is in the business of manufacturing large yachts. They have an agreement with one of their biggest customers that they will pay off their account of R18.5 million over the next three years, with JJ Industries receiving the payments according to the following schedule:

End of year 1: R4,000,000

End of year 2: R6,500,000

End of year 3: R8,000,000

The business has access to a market-linked investment account, which earns them 11% a year.

1.1- Using the tables, what PVIFs would one use to calculate the present values of each of the three cash inflows?

1.2- What is the present value of this income stream?

1.3- What is the total opportunity cost of allowing their customer to pay over three years, instead of right now?

1.4- If their customer offered them R15 million to settle their account today, would you recommend that JJ Industries accept it? Why, or why not?

1.5- In a brief point, mention one other factor that the business should take into account when allowing a customer to pay off an account over an extended period.

Question 2 -

Sarah has just finished her studies, and has started her career by accepting a position at an online learning company. Being a forward-thinking young woman, she is already looking ahead to her retirement, and wants to start putting money away now. She wants to retire 30 years from now, and wants a lump sum of R3 million at that point. To allow her to plan effectively, and to keep things simple, she wants to put away the same amount for the full period, at the end of each year.

2.1- Assuming that she receives an average growth rate of 9% p.a. for the period, how much does Sarah need to put away at the end of each year?

2.2- If she were to invest a lump sum now instead, to reach R3 million in 30 years, which also grew at 9% p.a., compounded annually, how big would this lump sum need to be?

2.3- At retirement, if she were to then take that lump sum of R3 million and buy an annuity, that would pay out annually for 20 years, and have a guaranteed annual return of 12%, how much would she receive every year?

2.4- When looking ahead to retirement, one always needs to take into account the effects of inflation. Using the answer from question 2.3, and with an average annual inflation figure of 6% over the period, what would the value of the fourth one of these annuity payments received (received exactly 35 years from now) be worth today?

Question 3 -

You are in the market to buy a new car. You have spotted the one you want, an absolute beauty of a demo model, and the sales rep has mentioned that the price is R150,000. You want to take out a vehicle loan, and approach your bank to do so. As you meet all the relevant affordability criteria, they are prepared to offer you a loan, fixed at 1.5% above prime, over a period of 50 months. They will not require you to put down a deposit, or pay a balloon payment.

3.1- What is the definition of the prime rate?

3.2- By being offered a rate above prime, does this mean you are a higher risk than someone being offered prime, or a lower one? Explain your answer in a brief point.

3.3- In this context, what is a balloon payment?

3.4- Using the information given, and assuming a prime rate of 10.5%, what will your monthly repayment be?

3.5- With that repayment figure, what would the total amount of the repayments paid over the 50 months be?

3.6- If you happened to be sitting on some extra cash, and put down a 20% deposit, would this affect your monthly repayment? If yes, what would it change to?