Reference no: EM132591576

TIME VALUE OF MONEY DECISIONS

Evaluate the case below:

As owner of MBM store you have set yourself the goal of purchasing a small storage complex as an investment three years from today. You have acquired a signed option from the current owner of the property to purchase the complex during the next 3 years at a purchase price of R500 000.00

Your bank manager has undertaken to give you a bond worth 90 percent of the purchase price, which means that you will have to pay the additional R50 000.00 out of your pocket before you will be able to purchase the complex. The bank will require of you to repay the mortgage bond over a period of 20 years at an interest rate of 11 percent per annum.

The business savings account with the bank currently has a balance of R25 000.00 and there are 3 years remaining to save another R25 000.00 in the same saving account to be able to purchase the complex. The savings account pays interest at a rate of 6 percent per annum compounded monthly. It is predicted that all interest rates in the economy will stay unchanged during the next 5 years.

Required

Question 1. What monthly amount will have to be invested in the beginning of each month into the savings account to be able to accumulate R50 000.00 at the end of 3 years?

Question 2. What is the monthly bond repayment the bank will require?

Question 3. After 4 years of bond repayments you decide to increase the repayment by R500.00 per month. How many months will it now take you to pay off the mortgage bond if the interest rates stayed unchanged? 

Question 4. How much would you be willing to pay TODAY for an investment that would pay R800.00 each year at the end of the next 6 years? Assume an interest rate of 5% compounded annually.