FTL821D. QUESTION 2 (Chapter 2B Time Value of Money) (25 MARKS)

As a procurement officer, you are expected to implement strong cost cutting measures within your organization. At same time, you are expected to initiate mechanisms that would aid your organization to realize its strategic goals. This includes inculcating a culture of saving thereby helping your organization financing its assets with a high proportion of funds being from its equity.

Suppose your organization is contemplating to buy a printing machine six years from now. The value of printing machine is estimated at N$250 000 for which a mandatory 20% deposit will be required. One of your colleagues under the finance department is of the view that no immediate acquisition should be made. Rather, the organization should start saving N$25 000 each year over the next six years at an interest rate of 6% per annum.

Required: Marks 2.1. Differentiate between an ordinary annuity, and annuity due. 1 2.2. Suppose the proposed saving arrangement is of an ordinary annuity nature, what will the total saving be at the end of six years? 2.5 2.3. Suppose the proposed saving arrangement is of an annuity due nature, what will the total saving be at the end of six years? 2 2.4. Given your answers in (2.2) and (2.3) above, are the funds raised through saving adequate to finance the proposed acquisition of a printing machine? If not, how much should your organization source from external sources?

6.5

2.5.

Given your answer in (2.4), suppose the external sources are willing to advance such funds (shortfall, if there is any) at 7% per annum payable in four yearly equal instalments at the end of each year. Required: Prepare an amortization table clearly indicating the Beginning balance,

Yearly instalment, Interest, Principal amount and Ending balance.

13

Total marks 25 NB: Please number your answers accordingly, and any qualitative answers should be provided in bullets form