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Assume that you are an analyst of a bank. You have been asked to take an examination that covers several financial analysis techniques. The first
Assume that you are an analyst of a bank. You have been asked to take an examination that covers several financial analysis techniques. The first section of the test addresses time value of money analysis. See how you would do by answering the following questions: a. Draw cash flow timelines for the following scenarios: an uneven cash flow stream of 30,90,75, and 65 at the end of years 0 through 3. (1 Mark) b. What does a cash flow of 30 represent in questions a? (1 Mark) c. You are required to find how long it will take a sum of money (or anything else) to grow to some specified amount with a certain compound interest rate. Specifically, if a company's investment has a real rate of return of 4% per year and the inflation rate is 6% per year, approximately how long will it take the investment to triple? (2 Marks) d. Is the annuity shown in the following cash flow timeline an ordinary annuity or an annuity due? Why? How would you change it to the other type of annuity? (2 Marks) e. The timeline below presents an uneven cash flow stream. What is the present value of this cash flow stream? The appropriate interest rate is 5%, compounded annually. (2 Marks) f. If 100 grows to 119.10 in 3 years, what is the annual interest rate? (2 Marks) g. What is the future value of f200 after three years under 5% semiannual compounding? Quarterly compounding? (2 Marks) h. Company A is evaluating two investment projects: Project X and Project Y. The initial investment for Project X is 20,000, and it is expected to generate net cash flows of 10,000 per year for 3 years. Project B requires an initial investment of 40,000 and is expected to generate net cash flows of 15,000 per year for 4 years. Calculate the profitability index (PI) for each project and advise which project the company should choose if the PI is the primary investment decision criterion. Use a discount rate of 8%. (3 Marks) i. Under which situation does the simple rate equal to the effective annual rate, and under which situation is the simple rate different from the effective annual rate? Explain. (2 Marks) j. Construct an amortization schedule for a 2,000 loan that has a 10% annual interest rate that is repaid in three equal installments
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