Question Tag: Annuity

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QTB – May 2017 – L1 – SB – Q3a – Mathematics

Determine the annual savings required to accumulate a future sum under annuity terms.

A lawyer plans to save a certain amount of money Nx per annum for 5 years on the first day of the year. If the interest rate is 8%, for him to receive N696,910.50, determine x. (10 Marks)

 

 

 

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QTB – Nov 2014 – L1 – SA – Q18 – Mathematics of Business Finance

Identifies the correct definition of an annuity.

An annuity is defined as the:
A. Specific amount of money saved at regular intervals meant to be used in funding some future financial commitments
B. Lump sum investment designed to produce a sequence of equal regular payments over time
C. Specific amount of money received at intervals which is not necessarily equal to fund some future financial commitments
D. Lump sum investment designed to produce a sequence of unequal but regular payments over time
E. Repayment of interest-bearing debts through a series of equal regular payments until the debt is entirely paid off with the accrued interest

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BMF – Nov 2022 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets

This question asks about periodic payments of equal amounts.

A series of regular periodic payments of equal amount is called:
A. Interest payments
B. Sinking funds
C. Compound interest
D. Simple interest
E. Annuity

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BMF – Nov 2019 – L1 – SA – Q14 – Basics of Business Finance and Financial Markets

Calculating the future value of semi-annual savings with compound interest

Larry wishes to save money towards his new-born daughter’s wedding. He intends to save ₦50,000 on the first day of every 6 months for 18 years, starting immediately. The account pays interest of 6% compounded semi-annually. What will be the balance on the account at the end of 18 years?
A. ₦3,258,748.33
B. ₦4,368,748.34
C. ₦5,278,748.33
D. ₦6,588,748.33
E. ₦6,788,748.33

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FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

a) TekApps is a small technology company that develops financial technology (FinTech) applications for mobile devices. The company is selling one of its highly rated FinTech apps to a financial institution. The financial institution has proposed the following strategic payment options for TekApps’ consideration:

Strategy 1: An immediate payment of GH¢1.2 million followed by payments of GH¢50,000 at the end of each quarter during the next five years.

Strategy 2: Payment of GH¢55,000 at the beginning of each month for the next five years.

TekApps’ required rate of return is 25% per annum.

Required:
i) Identify the type of cash flow pattern described under each option. (3 marks)
ii) Compute the present value of the cash flows for each strategy and advise TekApps on the best payment option. (7 marks)

b) BKB Entertainment Ltd (BKB) currently borrows at an average rate of 24% per annum. The Treasury Manager of the company believes that BKB can borrow at a lower interest rate if its creditworthiness is assessed and rated by a rating agency. He has therefore recommended to the Board of Directors to consider requesting a credit rating.

Required:
i) Explain TWO (2) benefits of credit rating to BKB. (4 marks)
ii) Advise the directors on THREE (3) factors rating agencies will consider in determining the company’s credit rating. (6 marks)

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FINANCIAL MANAGEMENT – MAY 2021 – L2 – Q1B – Discounted cash flow

Compute the effective annual interest rate and withdrawal amount for an investment account, and distinguish between annuity due and ordinary annuity.

Puma Beverages Plc currently operates a single processing plant in Tema. The company plans to install and run processing plants in four other regions in Ghana.

The Finance Manager has presented an investment and financing strategy for this expansion project to the Board of Directors for their study. The proposed investment strategy is that the company sets up the four processing plants in turns. Specifically, the company will install the first plant at the end of the fifth year from now, the second at the end of the sixth year from now, and the rest follow annually in that order.

The proposed financing strategy is that the company finances the expansion project with its retained earnings. To do this, the company should deposit GH¢100 million into an investment account today. The account will earn interest at an annual nominal interest rate of 16%, with monthly compounding through the account’s life. The company will withdraw even amounts from the account at the end of each year starting from the end of year five until the account is closed at the end of year eight (i.e., four withdrawals in all) to finance the installation of each of the four processing plants in line with the investment strategy.

Required:
i) Compute the effective annual interest rate on the investment account. (3 marks)
ii) Compute the even amount that should be withdrawn from the account at the end of each year from the fifth year to the eighth year such that the account balance reduces to zero upon the last withdrawal at the end of the eighth year. (5 marks)
iii) Distinguish between annuity due and ordinary annuity. (2 marks)

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QTB – May 2017 – L1 – SB – Q3a – Mathematics

Determine the annual savings required to accumulate a future sum under annuity terms.

A lawyer plans to save a certain amount of money Nx per annum for 5 years on the first day of the year. If the interest rate is 8%, for him to receive N696,910.50, determine x. (10 Marks)

 

 

 

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QTB – Nov 2014 – L1 – SA – Q18 – Mathematics of Business Finance

Identifies the correct definition of an annuity.

An annuity is defined as the:
A. Specific amount of money saved at regular intervals meant to be used in funding some future financial commitments
B. Lump sum investment designed to produce a sequence of equal regular payments over time
C. Specific amount of money received at intervals which is not necessarily equal to fund some future financial commitments
D. Lump sum investment designed to produce a sequence of unequal but regular payments over time
E. Repayment of interest-bearing debts through a series of equal regular payments until the debt is entirely paid off with the accrued interest

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BMF – Nov 2022 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets

This question asks about periodic payments of equal amounts.

A series of regular periodic payments of equal amount is called:
A. Interest payments
B. Sinking funds
C. Compound interest
D. Simple interest
E. Annuity

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BMF – Nov 2019 – L1 – SA – Q14 – Basics of Business Finance and Financial Markets

Calculating the future value of semi-annual savings with compound interest

Larry wishes to save money towards his new-born daughter’s wedding. He intends to save ₦50,000 on the first day of every 6 months for 18 years, starting immediately. The account pays interest of 6% compounded semi-annually. What will be the balance on the account at the end of 18 years?
A. ₦3,258,748.33
B. ₦4,368,748.34
C. ₦5,278,748.33
D. ₦6,588,748.33
E. ₦6,788,748.33

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FM – DEC 2023 – L2 – Q3 – Discounted cash flow | Sources of finance: debt | Working Capital Management

Identification of cash flow patterns, present value calculation for two payment strategies, and explanation of the benefits and factors related to credit rating.

a) TekApps is a small technology company that develops financial technology (FinTech) applications for mobile devices. The company is selling one of its highly rated FinTech apps to a financial institution. The financial institution has proposed the following strategic payment options for TekApps’ consideration:

Strategy 1: An immediate payment of GH¢1.2 million followed by payments of GH¢50,000 at the end of each quarter during the next five years.

Strategy 2: Payment of GH¢55,000 at the beginning of each month for the next five years.

TekApps’ required rate of return is 25% per annum.

Required:
i) Identify the type of cash flow pattern described under each option. (3 marks)
ii) Compute the present value of the cash flows for each strategy and advise TekApps on the best payment option. (7 marks)

b) BKB Entertainment Ltd (BKB) currently borrows at an average rate of 24% per annum. The Treasury Manager of the company believes that BKB can borrow at a lower interest rate if its creditworthiness is assessed and rated by a rating agency. He has therefore recommended to the Board of Directors to consider requesting a credit rating.

Required:
i) Explain TWO (2) benefits of credit rating to BKB. (4 marks)
ii) Advise the directors on THREE (3) factors rating agencies will consider in determining the company’s credit rating. (6 marks)

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FINANCIAL MANAGEMENT – MAY 2021 – L2 – Q1B – Discounted cash flow

Compute the effective annual interest rate and withdrawal amount for an investment account, and distinguish between annuity due and ordinary annuity.

Puma Beverages Plc currently operates a single processing plant in Tema. The company plans to install and run processing plants in four other regions in Ghana.

The Finance Manager has presented an investment and financing strategy for this expansion project to the Board of Directors for their study. The proposed investment strategy is that the company sets up the four processing plants in turns. Specifically, the company will install the first plant at the end of the fifth year from now, the second at the end of the sixth year from now, and the rest follow annually in that order.

The proposed financing strategy is that the company finances the expansion project with its retained earnings. To do this, the company should deposit GH¢100 million into an investment account today. The account will earn interest at an annual nominal interest rate of 16%, with monthly compounding through the account’s life. The company will withdraw even amounts from the account at the end of each year starting from the end of year five until the account is closed at the end of year eight (i.e., four withdrawals in all) to finance the installation of each of the four processing plants in line with the investment strategy.

Required:
i) Compute the effective annual interest rate on the investment account. (3 marks)
ii) Compute the even amount that should be withdrawn from the account at the end of each year from the fifth year to the eighth year such that the account balance reduces to zero upon the last withdrawal at the end of the eighth year. (5 marks)
iii) Distinguish between annuity due and ordinary annuity. (2 marks)

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