QUESTION $5$

$($a$)$ A printing machine which costs $20,000$ today will increase in price by $8\%$ per year as a result

of inflation.

$($i$)$ What would this machine cost in $3$ years' time?

$($ii$)$ If the firm wishes to purchase this machine by making $3$ equal instalments $[$the first

one now, the second one in one year's time and the third in two years' time$],$ in a

savings plan paying $5\%$ per annum, how much should each instalment be$?$ Show all

workings

$($b$)$ A small business has a choice of investing $20,000$ in one of two projects. The revenue

received in each over the next four years is given below.

$($i$)$ If the discount rate is $12\%,$ which of the two projects would you advise the company

to invest in$?$

$($ii$)$ Calculate the internal rate of return for your choice in part $($i$)$ above, use a discount

rate of $15\%.$

$($c$)$ How much would $2,000$ grow to in $3$ years if it could earn $10\%$ nominal interest which is

compounded every six months.