a. Your company has decided to set up a welfare fund with an initial payment of Ghc 275m which is compounded six-monthly over a four-year period at 20% per annum.
Calculate the:
i. Size of the fund at the end of the four years
b. An entrepreneur purchased a piece of equipment for its production department at a cost of Ghc 375m on January 15, 2015. It is anticipated that this piece of equipment will be replaced after five years of use on January 15, 2020. The The equipment is purchased with a five-year loan, which is compounded annually at 18%.
i. Determine the size of the equal annual payments.
ii. Produce an amortization schedule for the five annual repayments of the loan.
c. A company plans to buy equipment for Ghc 200m, half of which is due on delivery, with the balance due exactly one year later. The year-end cash flows are expected to be Ghc 50m per annum for five years. After exactly five years, the equipment will be sold for Ghc 10m,
i. If the company has to borrow at 20% per annum, analyze whether it is a worthwhile purchase.
ii. Solve question (c) above using a combination of Excel’s financial functions. Show your work and formulas/functions.
ii. Effective annual interest rate.
iii. Find (i) again using an appropriate Excel function.
iv. Find (ii) again using Excel’s “EFFECT” function. Show your Excel formulas.
v. Suppose a true effective annual rate is 22.5%. A bank would like to quote the equivalent nominal rate that would be compounded per month. What nominal rate should be quoted by the bank? Show your work.