Personal Finance Ch 1 Time Value of Money Flashcards
(3 cards)
2014 DSE MC Q13
Elsa plans to use the net present value to decide whether to buy a piece of office equipment. Which of the following pieces of information does she need to make the decision?
(1) cost of capital
(2) cashflows arising from the acquisition and use of the office equipment
(3) scrap value of the office equipment at the end of its useful life
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
D
2021 DSE MC Q4
Mandy is considering investing in a 3-year project with the following details:
Cash inflows/ (outflows) $
Beginning of Year 1 (70 000)
Beginning of Year 2 25 000
Beginning of Year 3 35 000
The scrap value at the end of the project is $20 000. The discount rate is 5% per annum. What is the net present value of the project?
A. -$14 445
B. $187
C. $2 832
D. $3 520
C
Sample paper DSE Q5
Mr Wong is going to buy a flat for residential purpose. The cash price for the flat is $1 380 000. The following are two of the financing proposals:
Proposal 1 Borrow a personal loan of $1 380 000 from a bank on 1 January 20X7, repayable by a lump sum of $2 000 000 at the end of 20X9.
Proposal 2 Purchase the property from the developer by instalments as follows:
Deposit, payable on 1 January 20X7 $600 000
Instalments, payable at end of 20X7 500 000
end of 20X8 400 000
end of 20X9 300 000
Total $1 800 000
The cost of capital is 10% per annum.
(a) Based on the financial information given, calculate (to the nearest dollar) the present value of Proposal 1 and Proposal 2. (5 marks)
(Proposal 1= $1502630, Proposal 2 = $1610518)
(b) Advise Mr Wong which financing proposal he should adopt. (2 marks)
He should adopt proposal 1 as its time-weighted cost is lower than that of proposal 2.
