Question

Question 1

Ahmed is a professional football player in UAE. Aljazeera Club is negotiating with him to join the club. The Club presented two offers to Ahmed; the first one is to pay him a big bonus on the signing day of the contract and smaller payments in the future, or a small amount now and bigger payments in the future. Which option should Ahmed accept and why? What about Aljazeera Club, which option is better for them?


Question 2
Al-khaznah Co. wants to sell an electrical generator for AED 165000 in 2024. The price of this generator in market today is $94000 (according to GE company who is the producer of this generator). If the discount rate on this generator is 13 percent per year. Do you think the firm will make a profit if they sell this generator? What is the rate that will make the firm breakeven?
Note: Profit = Revenue -cost


Question 3
Your uncle Abdallah is celebrating his 33th birthday today and wants to start saving for his retirement at the age of 63. He wants to be able to withdraw AED 100,000 from his saving account on each birthday for 20 years following his retirement. The first withdraw will be on his 64th birthday. Your uncle intends to invest his money in a local bank in Abu Dhabi that offers 7% interest rate per year. He wants to make equal payments on each birthday into the account established in the local bank for his retirement fund.
1. If your uncle starts making these deposits on his 33th birthday and continues to make deposits until he is 63, what amount must he deposit annually to be able to make the desired withdrawals at retirement?
2. If your uncle has just inherited a large sum of money, so instead of making equal payments, he has decided to pay one lump sum payment on his 33th birthday to cover his retirement needs. What amount does he have to deposit?
3. If your uncle’s employer informs your uncle that he will contribute AED 1,000 to your uncle account every year. Also, if your uncle expects AED100,000 from another investment on his 53th birthday, which he will also put into the retirement account. What amount must he deposit annually now to be able to make the desired withdrawals at retirement.

Answer 1

Answer ; (a) Profit = 7,197.59

(b) Break-even rate = 15.10%

Step-by-step explanation:

Question 1 :

Ahmed should opt for big bonus on signing day of the contract and smaller payments in future. Because as per time value of money concept money received tomorrow is lesser than the same money received today this means you can buy lesser things from same amount of money compared to things bought today. So as per this concept if Ahmed receives big bonus on signing contract and smaller payment in future will have greater value compared to other option i.e. small amount now and bigger payments in future.

Where as Aljazeera would like to have small amount now and bigger payments in future by opting this option club would end up paying lesser money in today's time. Than means present value of this option would be lesser than the another option which is paying big bonus today and smaller future payments.

Question 2:

Present value of generator = FV / (1+r)^n

= 165,000 / (1 + 0.13)^4

= 165,000 / 1.6305

= 101,197.59

Profit = 101,197.59 - 94,000 = 7,197.59

The firm will make profit of 7,197.59 if they sell this generator.

Break-even rate can be calculated by using the following excel formula:

=RATE(nper,pmt,pv,fv)

=RATE(4,0,-94000,165000)

= 15.10%

Break-even rate = 15.10%