Puma Beverages Plc currently operates a single processing plant in Tema. The company plans to install and run processing plants in four other regions in Ghana.
The Finance Manager has presented an investment and financing strategy for this expansion project to the Board of Directors for their study. The proposed investment strategy is that the company sets up the four processing plants in turns. Specifically, the company will install the first plant at the end of the fifth year from now, the second at the end of the sixth year from now, and the rest follow annually in that order.
The proposed financing strategy is that the company finances the expansion project with its retained earning. To do this, the company should deposit GH¢100 million into an investment account today. The account will earn interest at an annual nominal interest rate of 16%, with monthly compounding through the account’s life. The company will withdraw even amounts from the account at the end of each year starting from the end of year five until the account is closed at the end of year eight (i.e., four withdrawals in all) to finance the installation of each of the four processing plants in line with the investment strategy.

Required:
i) Compute the effective annual interest rate on the investment account. (3 marks).

ii) Compute the even amount that should be withdrawn from the account at the end of each year from the fifth year to the eighth year such that the account balance reduces to zero upon the last withdrawal at the end of the eighth year. (5 marks)

iii) Distinguish between annuity due and ordinary annuity. (2 marks)

The directors of PDS Foods Ltd (PDS) are considering two payment options for the purchase of a new cereal processing plant:

Option 1: Cash purchase option
This option requires immediate payment of the full price of the plant. If PDS chooses this option, it will pay the cash price of GH¢800,379 today. PDS plans to raise the required amount by borrowing from a bank. Conso Bank Ghana has offered to lend the cash price to PDS at an annual interest rate of 15% with monthly compounding. The loan, interest, and other charges are to be amortised by even instalments of GH¢27,952.26 each made at the end of each month over the next three years.

Option 2: Credit purchase plan
Under this option, the vendor requires an immediate down payment followed by a series of even payments. If PDS chooses this option, it will be required to pay GH¢50,000 today. This will be followed by the payment of GH¢116,100 at the end of each quarter over the next two years. The interest rate implicit in this credit purchase plan is 20% per annum.

Required:
i) Find the present value of all the payments under the cash purchase option. (5 marks)

ii) Find the present value of all the payments under the credit purchase option. (4 marks)

iii) Which of the two options do you recommend to the company? Explain. (1 mark)

Odapagyan Foods Ltd is borrowing GH¢500,000 to finance a project involving an expansion of its existing factory. It has obtained an offer from Sika Bank. The terms of the loan facility are as follows:

Annual interest rate                  : 22%
Duration                                   : 2 years
Interest method                         : compound interest with quarterly compounding
Payment plan                            : equal instalments at the end of each quarter

Required:
i) Compute the quarterly instalment. (3 marks)

ii) Prepare a loan amortisation schedule to show the periodic interest charges, instalment payments, principal payments, and balance of the loan at the end of each quarter. (7 marks)

a) Joy Mummy Ltd is establishing an endowment fund to finance a scholarship scheme to provide funding for the education of children of its employees. The company plans to make an initial deposit of GH¢500,000 into the fund now. The initial deposit will be invested for three years before any disbursements will be made from the fund. The effective annual rate of return on the fund is expected to be 14% in the first year, 15% in the second year, and 16.5% in the third year.

Required:
Compute the balance of the fund at the end of three years.                                                                                               (4 marks)

b) Wobete Ltd is offering 5 million units of 15-year bonds with a face value of GH¢100 each. Though the bonds are being offered at a price of GH¢95 each, the bonds will be redeemed at a premium of 10%. The annual coupon rate of the bonds is 15%. Interest is payable at the end of every six months.

A provision in the bond indenture requires that Wobete Ltd establishes a sinking fund to accumulate enough money to pay the total redemption value of the bonds upon maturity.
To comply with this provision, Wobete Ltd plans to set aside an even amount at the end of each quarter over the next 15 years. Each of the even amounts that will be set aside will be invested at an annual interest rate of 12% with quarterly compounding.

Required:
Calculate the even amount that should be put into the sinking fund at the end of each quarter to raise enough money to pay the total redemption value of the bonds.                                                                                                                                  (6 marks)

Dinpa Supermarket is considering acquiring a loan of GH₵300,000 from Abrempong Bank Ltd. The loan is payable in five equal annual instalments at an interest rate of 25%. Dinpa Ltd has consulted you to determine their annual repayment amount and the interest thereon.
Required:
i. Prepare a repayment schedule for Dinpa indicating clearly the interest payment and the principal repayment.           (8 marks)

ii. State THREE (3) advantages of a term loan over an overdraft facility.                                                                       (3 marks)