Apr 10, 2023
• Instructions to students: All questions are compulsory

Materials:

Dictionaries are not permitted.

Question 1

a)A friend has received an inheritance of £40,000 and has decided to spend £5,000 now and invest the rest until he completes his medical training in six years’ time. He has been offered two different investments, and has asked you to identify the best choice. The first investment accrues quarterly interest at a rate of 6% p.a., while the second will pay £54,000 at the end of the six years.

i)Calculate the total interest your friend will earn if he chooses the first investment option. (1.5 marks)

ii)Calculate the annual interest rate that is being offered by the second investment. (1.5  marks)

iii)Which of the two investment should your friend take? Why?(1 mark)

b)A University is looking to replace the audiovisual equipment in three of its lecture halls. The new equipment, which will cost £250,000, is believed to have a useful life of five years, after which it is expected to have a salvage value of £20,000.

i)Calculate the annual depreciation using the linear method.(2 marks)

ii)Calculate the value of the equipment after 3 years, using the reducing-balance method, with a 30% p.a. depreciation rate.(3 marks)

c)What is the present value of a 3-year monthly annuity of £250, if the interest rate applied is 4.5% compounded monthly?(4 marks)

d)Your medical student friend, from question 1 above, has contacted you again, as he is entering a partnership with a local retailer in one of two investment projects. Your friend’s money would fund 25% of the initial investment for either of the projects. The cash flows generated by the projects are summarised in the table below:

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