MSO3610/2023-24/April 2024B Question 2 (a) Briefly describe the concept of Present Value. (b) A project has...

Transcribed Image Text:

MSO3610/2023-24/April 2024B Question 2 (a) Briefly describe the concept of Present Value. (b) A project has the following cash flows: YEAR 0 1234 2 3 4 CASH INFLOW CASH OUTFLOW 0 8400 6600 4000 7900 4000 6100 3000 4100 2000 [2 marks] Calculate the NPV if the interest rate is 2%. Calculate the NPV if the interest rate is 4% Estimate the IRR of the project. (c) Explain why we are interested in finding the IRR of a project. [6 marks] [3 marks] (d) Briefly describe the difference between a repayment mortgage and an interest only mortgage. Given that an individual can either take a repayment mortgage or an interest only mortgage at the same rate and the same term which one will cost more? Why would someone choose the more costly option? [5 marks] (e) A repayment mortgage of 120,000 secured on a house charges 3.25%/annum nominal rate compounded monthly over 25 years. Calculate the monthly payments. [4 marks] (f) What is the value of a bond with a redemption value of $1,000 @ 4.5% nominal interest payable twice annually and redeemable in 2 years? The prevailing interest rate is 2.2%. You must use continuous compounding discounting. [5 marks] MSO3610/2023-24/April 2024B Question 2 (a) Briefly describe the concept of Present Value. (b) A project has the following cash flows: YEAR 0 1234 2 3 4 CASH INFLOW CASH OUTFLOW 0 8400 6600 4000 7900 4000 6100 3000 4100 2000 [2 marks] Calculate the NPV if the interest rate is 2%. Calculate the NPV if the interest rate is 4% Estimate the IRR of the project. (c) Explain why we are interested in finding the IRR of a project. [6 marks] [3 marks] (d) Briefly describe the difference between a repayment mortgage and an interest only mortgage. Given that an individual can either take a repayment mortgage or an interest only mortgage at the same rate and the same term which one will cost more? Why would someone choose the more costly option? [5 marks] (e) A repayment mortgage of 120,000 secured on a house charges 3.25%/annum nominal rate compounded monthly over 25 years. Calculate the monthly payments. [4 marks] (f) What is the value of a bond with a redemption value of $1,000 @ 4.5% nominal interest payable twice annually and redeemable in 2 years? The prevailing interest rate is 2.2%. You must use continuous compounding discounting. [5 marks]