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QUESTION 2: Time value of money [15] 2.1 Assume a firm makes a R3 500 deposit into its money market account. If this account is currently paying interest of 0,7%, what will the account balance be after one year? (2) 2.2 If David and July combine their savings of R4 250 and R1 750 respectively, and deposit this amount into an account that pays 6% annual interest, compounded monthly, what will the balance in the account be after four years? (2) 2.3 Joel just won R2,5 million in the lottery. She is given the option of receiving a total of R1,3 million now, or she can elect to be paid R100 000 at the end of every year for the next 25 years. If Joel can earn 5% annually on her investment, from a strict economic point of view, which option should she take? (5) 2.4 Joseph is a friend of yours. He has plenty of money but little finance sense. He received a considerable amount as a gift for his recent graduation and is looking for a bank in which to deposit the funds. HSBC Bank offers an account with an annual interest rate of 4% compounded monthly, while Dutch Bank offers an account with a 4,05% annual interest rate compounded quarterly. Recommend to Joseph which account he should choose. (3) 2.5 Gin and Tonic have just had their first child. If college is expected to cost R200 000 per year in 18 years, how much should the couple begin depositing annually at the end of every year to accumulate enough funds to pay the first year's tuition at the beginning of the 19th year? Assume that thevan earn a 6% annual interest rate on their investment. (3)

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