Question 2 (20 marks, 5 marks each)

a. Heather will receive $15,000 at the end of every year for the next 15 years as a payment for a new song she has written. If a 10 % return is applicable, should she be willing to sell out her future rights now for$120,000? (Show all calculations supporting your decision).

b. A mail order business will generate cash flows of $10,000 at the end of each of the next 3 years, $20,000 at the end of year 4, $30,000 at the end of year 5 and $50,000 at the end of year 6. Given that other investments of equal risk earn 6% per annum, calculate the present value and future value of this investment. (Show all calculations supporting your answers).

c. An investment firm Xypex pays 7.5% interest per annum, compounded on a quarterly basis. To remain competitive, the investment manager of another investment firm Zebra Ltd is willing to match the interest rate offered by Xypex, but interest will be compounded on a monthly basis. What nominal rate of interest must firm Zebra offer to its clients? (Show all calculations).

d. While William was a student at Edinburgh University, he borrowed $15,000 in student loan at an annual interest rate of 9%. If he repays $2,000 per year, calculate the period required (to the nearest year) to pay off his debt. (Show all calculations).

3. Retirement Planning (20 marks)

Professor Sandra Laneway received a payment of $500,000 from her grandmothers estate on what is coincidentally her 63rd birthday. Sandra invested the entire inheritance amount today at an interest rate of 8% per annum (compounded monthly) due to mature on her 70th birthday when she plans to retire.

Upon retirement Sandra plans to commute her investments to a monthly pension which she plans to receive until her 90th birthday. During this 20 years of post-retirement Sandra estimates that she will require an annual pension income of $84,000 ($7,000 per month) in order to live in the manner to which she is accustomed. She expects to receive her first monthly pension payment 1 month after her 70th birthday. In addition, Sandra would like to have a remaining balance of $200,000 in her account at the conclusion of her 20-year pension.

Sandra understands that the $500,000 inheritance she has invested will not achieve all of these things and wants to invest an additional monthly amount from her pre-retirement income as a Professor at Sydney University during the next 7 years leading to her planned retirement.

Calculate how much Professor Laneway needs to invest (starting in one months time) in order to achieve her investment goals.

This is a multi-part question that requires careful planning and the development of timelines is recommended (show all workings).