1
M.Sc.
Finance
M.Sc. Investment &
Finance
M.Sc. International Banking &
Finance
M.Sc. International Accounting & Fina
nce
2009/20
10
40901 Finance I: Tutorial One
SOLUTIO
NS
Some straightforward questions on the use of future values and present
value factors.
Q1. a) You have £100 available today to invest for twenty years and the annual
interest rate is 8 per cent. The interest payments are to be reinvested, also
at a rate of 8 per cent. How much will you have available twenty years
from now?
100
(
1
+ .08
)
20
= 100
×
4.6610
=
466.10
b) Assume that the interest rate is 4 per cent rather than 8 per cent and
repeat the calculation carried out to answer part (a). [Observe the
difference in the sums available in year twenty.]
100
(
1
+ .04
)
20
= 800
×
2.1911
=
219.11
Sum accumulated at 4 per cent is less than 50 per cent of that built up at 8
per cent – reflects the lower interest rate and the effects of “compounding”
over time.
Q2. a) You decide to save £2,000 per annum and place the savings in a deposit
account at the end of each of the next five years. If you can invest your
savings at 12 per cent how much will you have accumulated by the end of
year five?
V5
= 2,000
×
FVAF5 / 0.12
= 2,000
×
6.3528
=
12705.69
b) You are given £500 today and decide to place this in a savings account
which will earn interest at 12 per cent. You decide to save £500 for each
of the next five years to add to the initial sum. How much will you have in
the savings account by the end of year five?
5
V5
= 500(1 +
0.12)
+ 500
×
FVAF5 / 0.12
= 500
×
1.7623
+ 500
×
6.3528
=
4057.57
