Find the future value of an ordinary annuity with Ksh.1500 monthly payments and 6% annual interest for 12 years.
QUESTION FIVE (20 Marks)
(a) (i) Define the term annuity. (2 marks)
(ii) Find the future value of an ordinary annuity with Ksh.1500 monthly payments and 6% annual interest for 12 years. (4 marks)
(b) The model A= P(1 + r)2describes the amount of money Ain an account after 2 years when Pshillings are invested at interest rate rcompounded annually. At what interest rate will 10,000 grow to 12,100 in 2 years? (3 marks)
(c) (i) Define the term payback period as used in project appraisal. (1 mark)
(ii) Explain any two problems of using net present value to appraise an investment project. (2 marks)
(iii) BRITZ insurance has identified that it could male operating cost savings in production by partnering with advertising agencies. There are two suitable such agencies on the market, MagEvents and OneWorld. The relevant data relating to each of these are as follows:
MagEvents
OneWorld
Cost(Payable immediately) Annual Savings:
20,000
25,000
Year 1
4,000
8,000
2
6,000
6,000
3
6,000
5,000
4
7,000
6,000
5
6,000
8,000
The annual savings are, in effect, opportunity cash inflows in that they represent savings rom the cash outflows that would occur if the investment were not undertaken. Which, if either, of these agencies should be partnered with if the financing cost is a constant 12% per annum. (8 marks)
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