QUESTION 1:

a) What is meant by time value of money?

b) Draw a cash flow diagram to show how much money a person should be willing to pay now that will yield RM400 per year for 5 years, starting next year if the interest rate is 10% per year. (Note: DO NOT solve the problem)

c) How do you obtain a nominal interest rate (r)?

QUESTION 2

a) What is Depreciation Life?

b) It is estimated that a certain piece of equipment can save RM22,000 per year in labor and material costs. The equipment has an expected life of five years and has no market value after five years. The company must earn a 10% annual return on such investments.

i)  Draw a cash-flow diagram from the company's perspective.

ii) How much money could be justified by the company to purchase this piece of equipment?

QUESTION 3

A bank credit card carries an interest rate of 2% per month on the unpaid balance.

a) Calculate the effective rate per semi-annual period.

b) If the interest rate is stated as 5% per quarter, find the effective rates per semi-annual and annual periods.

QUESTION 4:

A company expects to realize a revenue of RM100,000 during the first year starting now from the sale of a new product. Sales are expected to decrease gradually with uniform gradient due to competition to a level of RM 47,500 on the eighth year from now.

i) Draw the cash-flow diagram following the end-of-period convention.

ii) If the revenue is invested at a rate of 10 %, what will be the compound amount eight years from now?