Individual Assignment – Financial Mathematics I

a) Ben deposits $8000 into a savings account on 18 April. Ben’s money earns 16.5% interest per
year compounded half yearly credited on 1 June and 1 December every year.
i. How much money will he have in the bank at the end of nine months, if simple interest is used
for odd periods and compound interest for the full terms? [ 5 Marks]
ii. How much money will Ben have in the Bank after nine months, if fractional compounding is
used for the full term? [ 5 Marks]
b) On 3 January Granddad Steyn deposited $ 2500 into a savings account for his grandchild who
was born on 26 July the previous year. Interest is credited at 18.75% per year on the first day of
every month.
i. How much money does his grandchild receive on his first birthday if simple interest is used
for odd periods and compound interest for the rest of the term? [ 5 Marks]
ii. How much does he receive if fractional compounding is used for the full period? [ 5 Marks]

c) To pay off a loan of $7000 due now and a loan of $2000 due in 14 months’ time, Lucky agree to
make three payments in two months , five months and ten moths time respectively. The second
payment is to be double the first payment and the third payment is to be triple the first
payment. Determine the size of each of the three payments if interest is calculated at 16% per
annum compounded monthly [10 Marks]
d) Show that the Present Value of an Ordinary Annuity Certain with payment A , interest rate r and
(1−(1+𝑟)−𝑛
maturing in n years is given by 𝐴[ 𝑟
] [10 Marks]
e) An Investor must select between two alternative projects A and B. The initial investment outlays
and the cash inflows for each are set out in the table below.

Year Proposal A Proposal B

0 ($76 000) ($80 000)

1 $30 000 $31 000
2 $30 000 $31 000
3 $33 000 $31 000
4 $32 000 $31 000

The cost of capital is 14%

Use the Net present Value and Profitability index to advise the Investor concerning the
two Investments [10 Marks]