| Subject Code : | ACST1001 | Country : | Australia |
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Assignment Task:
Task:
Question 1 (10 Marks)
As a citizen of Taiwan where ‘Taipei 101’ was once the tallest building in the world from 2004 to 2010, Steve’s favourite number is 101. He passed ACST101 Finance 1A last session and found the unit to be terribly boring. Fortunately, his learning did not stop with passing the unit. Recently, he came up with an idea for calculating the present value of a special annuity. The annuity will pay $1, $0 and $1 at the end of each of the next 3 years, respectively. This special payment stream will then repeat for another 9 times (i.e., 10 times in total) in 3-year periodic intervals, such that the last payment of $1 will be 30 years from now.
It is known that the effective annual rate is 5%.
(a) Calculate the present value of this special annuity if the special payment stream is only occurring once, that is, there are payments of $1 are at the end of year 1 and year 3 only.
(b) Using the answer from part (a), draw a timeline with the original cash flows, as well as an equivalent stream of 10 present values. In particular, your timeline should address the following:
(i) What are the specific timings for the 10 streams of present values?
(ii) What is the periodicity of the 10 streams of present values?
(iii) What is the effective periodic rate?
(c) Following from part (b), calculate the present value of this special annuity (i.e., the special payment stream occurs 10 times).
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