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Mid-term exam 2020

MTH5124: Actuarial Mathematics I

Question 1  [40 marks]. A family in London is buying a house and has taken out a

£300,000 mortgage to be repaid in annual instalments over 25 years. The first payment is due

at the end of the 1st year of the mortgage. Determine the schedule of payments assuming an AER of 4.5%.                            [40]

Question 2  [60 marks]. A car manufacturer is to develop a new model to be produced from 1st January 2024 to an indefinite time in the future. To this end a plot of landis

purchased on 1st January 2021 for £15 million. Development costs will be £1 million per

quarter from the date of the land purchase until the start of production. All development costs are assumed to be incurred at the beginning of each quarter. It is assumed that from 1st

January 2024 onwards, 200 cars will be produced every quarter and that all will be sold in the same quarter. The production cost per car will be £12,000 and all production costs will be

incurred at the beginning of each quarter. The sale price per car will be £25,000 and all

revenue from sales is assumed to be received at the end of each quarter. Assume an effective rate of interest of 6% p.a..

(a)  Calculate

(i) the discounted payback period of the project [15]

(ii)  the accumulated value of the project after 10 years                                                    [10]

(iii) the internal rate of return for the project after 10 years                                              [10]

(b)  The manufacturer now makes two additional assumptions: (1.) not all cars will be sold in the same quarter in which they are produced: 50% will be sold in the same quarter

and 50% in the following quarter; (2.) both production costs as well as the sales price    will increase by 4% p.a. effective starting 1st January 2026. Recalculate (i), (ii), (iii) of (a) under these two additional assumptions.                                    [25]