# Financial Management

a)A wealthty industrialist wishes to establish a $2,000,000 trust fund which will provide income for his grandchild into perpetuity.He stipulates in the trust agreement that the principal may not be distributed.The grandchild may only receive the interest earned.If the interest rate earned on the trust is expected to be at least 7 percent in all future periods, how income will the grandchild receive each year?

Answer From financial calculator

$2,000,000PV

1N

7%I/Y

CPT

PMT=2,140,000

$2,140,000 - $2,000,000 = $ 140,000

The granchild will receive $140,000 for each year

b)Nicole establishes a seven-year, 8 percent loan with a bank requiring annual end-of-year payments of $960.43. Calculate the original principal amount.

Answer From financial calculator

$960.43PMT

7N

8%I/Y

CPT

PV=$5000.35

The original principal amount are $5000.35

c)Calculate the present value of $5,800 received at the end of year 1, $6,400 received at the end of year 2, and $8,700 at the end of year 3, assuming an opportunity cost of 13 percent.

Answer From financial calculator

i)$5,800FV

1N

13%I/Y

PMT

CPT

PV =$5132.74

ii)$6,400FV

2N

13%I/Y

PMT

CPT

PV =$5012.14

iii)$8,700FV

3N

13%I/Y

PMT

CPT

PV =$6029.54

$5,800 + $6,400 + $8,700 = $20,900

The total present value of $5,800.$6,400 and $8,700 are $20,900

Question 2

a)Mr Knowitall has been awarded a bonus for his outstanding work.His employer offers him a choice of a lump-sum of $5,000 today, or an annuity of $1,250 a year for the next five years. Which option should Mr Knowitall choose if his opportunity cost is 9 percent ?

i)$1,250PMT

5N

9%I/Y

CPT

PMT

b)In their meeting with their advisor,Mr and Mrs Smith concluded that they would need $40,000 per year during their retirement years in order to live comfortably. They will retire 10 years from now and expect a 20-year retirement period.How much...

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