2.1 Briefly discuss the concept of time value of money.

(2)

2.2 Briefly discuss the difference between simple and compound interest.

(2)

PART B

You recently visited a second-hand book shop where you saw a poster from April 1984 advertising a 2 litre bottle of a popular cola drink at R3.50.Currently,(April 2015) a 2 litre bottle of the same cola is priced at R13.00.

Required

2.3 Calculate the rate of inflation (i%) relating to the increase of the price of a 2 litre

cola bottle over the years represented in the scenario.(3)

PART C

Chris wants to save for his daughter's tertiary education.Chris's daughter Danielle just turned 1 year old and in 17 years' time will attend university.Currently (2015), you will need R100 000 for a three year degree.It is expected that the cost of education will increase by 6% per year.

Required:

2.4 How much will the cost of education be by the time Chris's daughter is ready to attend university?(4) 2.5 Using your answer from 2.4, how much money must Chris invest today in order to have enough money to pay for his daughter's education in 17 years' time? Chris can invest money at a rate of 13% compounded annually.(3)

PART D

A bank quotes you an interest rate of 12.5% compounded monthly.

Required:

2.6 Calculate the effective interest rate.(3)

PART E

You are faced with two investment alternatives.

Investment A: Invest a R10 000 lump sum today at 16% compounded annually which will mature in five years.

Investment B: Invest R2 000 each year for the next five years at 24% compounded annually.

Required

2.7 Which of the two alternatives would you invest in over the five-year period?

Motivate your answer.(Show all calculations)(6)