Semester “Fall 2010”
“Money & Banking (MGT411)”
Assignment No. 01 Marks: 20
Mr. Naeem is working as a finance manager at Superior Textile Mills Limited, after completing his MBA (Finance) from Virtual University of Pakistan.
Recently, he got married and shifted his family in a rented house near the office. Paying monthly rent is a painful experience and in this way he cannot save much for his future needs. Therefore, he is planning to purchase his own house for avoiding monthly rental expense. For this purpose he is expecting to sell share in his native house for Rs. 1,500,000/- which is not a sufficient amount to buy house in a big city. After considering various areas in Faisalabad city, he chose Model Town for his desired future residency. Based on the house prices data in that area, he learned that an average two bed room house currently costs Rs.2,400,000/-. So he has to set aside some funds for the next eight years so that he may be able to purchase his own house after having sufficient funds.
As Mr. Naeem is planning to purchase the house after eight years, so it is quite clear that the prices of the houses will not remain the same overtime. In order to estimate the rate at which the house price will increase he considered the historical price appreciation data in that area and resulted that house prices appreciated at the rate of 4% per annum.
Mr. Naeem is planning to invest the funds that will be devoted for purchasing the house, in a portfolio of investment. He feels that this investment portfolio containing stocks, bonds and govt. securities will give him the rate of return of 9% p.a.
SOLUTION
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Q#1: Considering the fact that the vu39.com house prices will grow at the rate of 4% per annum, what will be the future house price of the house Mr. Naeem intends to buy after 8 years
FV = PV (1+i )n
FV = 1,500,000 (1+0.04)8
FV = 1,500,000 (1.04)8
FV = 1,500,000 (1.3685)
FV = Rs. 2,052,853/-
Q#2: Based on the answer from Q#1(FV), how much amount Mr. Naeem should invest today (which earns 9% rate of return) so that he may be able to purchase his house after 8 years.
2,052,853 = PV (1+0.09)8
2,052,853 = PV (1.09)8
2,052,853 = PV (1.9925)
PV = 2,052,853 / 1.9925
PV = Rs. 1,030,290/-
Q#3: Assume the vusolutions house prices appreciate at the rate of 6% per annum instead of 4% then how much he should invest today in order to be able to purchase the house after 8 years.
FV = 1,500,000 (1.06)8
FV = 1,500,000 (1.5938)
FV = Rs. 2,390,772/-
2,390,772 = PV (1.09)8
2,390,772 = PV (1.9925)
PV = 2,390,772 / 1.9925
PV = Rs. 1,199,885/-
Q#4: If Mr. Naeem decides to deposit in less risky certificate of deposits earning vusolutions only 5% p.a. then how much funds he has to deposit in his bank to be able to purchase the house after 8 years.
2,052,853 = PV (1.05)8
2,052,853 = PV (1.4775)
PV = 2,052,853 / 1.4775
PV = Rs. 1,389,409/-
Q#5: If Mr. Naeem decides to invest in more risky growth stocks earning 12% rate of return then how much funds he has to invest to purchase his house after eight years.
2,052,853 = PV (1.12)8
2,052,853 = PV (2.4759)
PV = 2,052,853 / 2.4759
PV = Rs. 829,137/-
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