FINA2006 Principles of Finance

Question:
Assuming you are applying for a finance job that requires a Bachelor of Commerce degree
and your potential employer asks you to respond to two scenarios below.
Scenario 1
Assuming you had $30 000 ‘spare cash’ at the beginning of 1976 and could have used this
money to buy a block of land for investment, or to invest in a savings account. The savings
account paid interest at 6% per annum, compounded quarterly, and was an ‘at-call’ account,
i.e. you could withdraw money at your discretion at any time. At the end of 2015, you were
approached by a real estate agent in your local suburb, who was interested in listing the land
on behalf of his agency and thus valued the land at an approximate price of $500 000
without charging you a valuation fee.
Required:
Evaluate the above two investment options based on the following criteria and determine
which option would have been better at the beginning of 1976 based on these criteria. Note:
You are expected to justify and show full calculations for each criterion.
a) The value of each investment at the end of 2015, i.e. land and savings account.
b) The rate of growth in the land value over the period 1976-2015, expressed as a
nominal interest rate. Note: The interest was compounded quarterly.
c) The rate of growth in the land value over the period 1976-2015, expressed as an
effective interest rate. Note: The interest was compounded quarterly.
d) The amount of cash that would have been invested in the savings account at the
beginning of 1976 to accumulate the same value as the land value estimated by
the real estate agent at the end of 2015


Price: £ 89

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