Calculate the fixed amount of money

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Reference no: EM132583599

Question 1:

John wishes to create his own life annuity plan. He expects to retire at age 60. He plans to deposit a fixed amount of money in a retirement account each year starting from age 30. Assume all amounts are deposited or withdrawn at the end of the year Suppose the account can earn an annual rate of 5%.

(a) If John wants to withdraw $120,000 each year starting from age 60 for the next 20 years, calculate the amount that should be accumulated in the retirement account at age 60.

(b) Calculate the fixed amount of money that John requires to deposit per year for 30 years, starting from age 30 to accumulate the amount calculated in part (a).

(c) In the past 5 years, Industrial and Commercial Bank of China (ICBC) has offered a stable dividend distribution of HK$0.26 per share each
year What is the annual rate of return of this investment if you can buy ICBC share at $5.2 in the market?

(d) John wishes to invest in shares to create his life annuity plan. What are the potential risks of this method to provide a steady income?

Question 2: Suppose an average family in Hong Kong can repay HKS24,000 monthly instalment for a home mortgage. Assume 70% of the property value is borrowed from the bank as a mortgage loan. The mortgage is to be repaid in 20 years or 240 months.

(a) Estimate the property value that is affordable by the average family if the interest rate is 4% per annum.

(b) Estimate the new property value that is affordable by the average family if the interest rate is 7% per annum.

(c) Compare the property value that is affordable by an average family in (a) and (b), what is the effect on the property value with the rise in interest rates?

Question 3: (a) Identify the two categories of sources of finance for a public limited company.

(b) If the company director proposed to issue bonds to raise fund for the construction project, explain the strengths and weaknesses of a bond as a tool for project financing to the company director.

Year	Project 1	Project 2	Project 3
0	-$1,800,000	-$1,500,000	-$2 000.000
1	$500,000	$600,000	S1,000,000
2	$600,000	$800,000	S1,000,000
3	$600,000	$900,000	S500,000
4	$1,000,000	$700,000	S300.000

(i) Calculate the payback periods of these three projects. Which project ranks first based on the payback period rule?

(ii) If the cost of capital for these projects is 7%, which project do you recommend based on NPV rule if these projects are mutually exclusive?

(iii) Which methods gives a better investment decision, and why?

Reference no: EM132583599

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