Quantitative Methods Chapter 6
Notes
Annuity:
An annuity is a series of regular periodic payments of equal amount. It is a constant cash flow for a given
number of time periods.
The present value / future value of an annuity can be computed by multiplying amount (Rentals) by the
discount factor.
There are three types of annuities:
Ordinary annuity – payments (receipts) are in arrears i.e. at the end of each payment period
Annuity due – payments (receipts) are in advance i.e. at the beginning of each payment period.
Delayed/Deferred Annuity – first payment (receipt) is made more than the normal time interval.
Present Value of Annuity:
If we are to receive equal installments for the certain years to come at a given rate, present value of the
annuity signifies how much it is worth or offered today. Present value of an annuity also reflects how
much amount can be borrowed if exact amount for installments is known.
( )
Ordinary: = R[ ]
( )
Due: = R[ ]x( )
( )
Deferred: = R[ ]x
Future Value of Annuity:
Amount of an annuity or future value of an annuity is the total of all the installments together with the
compound interest of each payment for the period.
( )
Ordinary: = R[ ]
( )
Due: = R[ ]x( )
Perpetuity:
A perpetuity is a constant annual cash flow ‘forever’, or into the long-term future. It is an annuity in
which the cash flows continue forever.
There are three types of Perpetuities:
Ordinary Perpetuity – payments (receipts) are in arrears i.e. at the end of each payment period
Perpetuity due – payments (receipts) are in advance i.e. at the beginning of each payment period.
Delayed/Deferred Perpetuity – first payment (receipt) is made more than the normal time
interval.
Ordinary: =
Permal Sajjad(APFA,ACFMA) Page 1
Quantitative Methods Chapter 6
Due: = x( )
Deferred: = x
Net Present value (NPV):
The difference between an investment’s market value and its cost is called the Net Present Value
(NPV) of the investment.
Investments with positive net present value means that more value is created or added for the
investors.
NPV = PV of inflows – PV of outflows
If NPV is negative, reject the project.
If NPV is positive, accept the project.
If NPV is zero, accept the project.
Internal Rate of Return (IRR):
It is also known as minimum required rate of return.
It is the average annual investment return from the project.
Discounted at the IRR, the NPV of the project cash flows must come to 0.
IRR = A% + x (B – A) %
Lecture Questions
Q1 The present value of an annuity of Rs.5000 for 15 years at 3.5% p.a. C.I. is: 57587.05
Q2 Find the present value of an annuity to Rs.10,000 per month for 5.5 years at an interest rate of 8%
compounded monthly ?
Q3 Deposits of Rs.100 are made every quarter in an account which pays 4% compounded quarterly .
How much in the account after 15 deposit ? 2201.90
Q4 The present value of an annuity of Rs.200 each month for 4 years at 6% compounded monthly is ? 2838.7
Q5 Find the present value of perpetuity of Rs.5000 payable at the end of each semi-annual period. If
the rate of interest is 4% compounded semi-annually? 250000
Q6 The present value of an annuity of Rs.600 payable ate the end of each year for 15 years if the
interest rate is 9% compounded annually ? 4836.41
Q7 In how many years will an annuity of Rs.400 amount to rs.4,064 at 3% p. a . compound interest? 9 years
Q8 If the amount of an annuity after 25 years at 5% p. a C.I is Rs.50000 the size of payment will be? 1047.62
Q9 The present value of an annuity if the size of each payment is Rs.200 payable at the end of each
quarter for 8 years at the interest rate of 7 % compounded quarterly? 4868.772
Q10 Mr. X takes a loan of Rs 50,000 from Habib Bank. The rate of interest is 10% per annum. The
first installment will be paid at the end of year 5. Determine the amount of equal annual
installments if Mr. X wishes to repay the amount in five installments? 19311.29
Permal Sajjad(APFA,ACFMA) Page 2
Quantitative Methods Chapter 6
Q11 Rs.600 is invested at the end of each quarter in an account paying interest 8% per year compounded
quarterly. What is the future value of this annuity after 8th payment? 5149.78
Q12 Mr. Ahmad invests Rs.9000 every year starting from today for next 13 years. Suppose interest
rate is 15% per annum compounded annually. Future value of the annuity is? 355542.34
Q13 A company is expected to pay Rs. 1920 every six months on a share for its stocks. The present
value of the share for its stocks. The present value of a share if money is worth 8% compounded
semi-annually is? 48000
Q14 Angela is able to pay Rs.230 a month for 6 years on a car loan. If the interest rate is 7.9 percent,
how much can she afford to borrow to buy a car? 13154.54
Q15 Find the future value of an annuity of Rs.720 for 9 years at interest rate of 8% compounded
annually? 8991.04
Q16 The present value of a perpetuity with an annual year end payment of Rs.1500 and expected annual
rate of return equal to 12% is? 12500
Q17 M Waqas receives Rs.3000 annually forever. The stated annual discount rate is 7%, compounded
every six months. The present value given the following assumption is? 42857
Q18 Mr. Waize invests Rs.5000 every year starting from today for next 10 years. Suppose interest rate is
8% per annum compounded annually. Future value of the annuity is: 72432.81
Q19 A person will get the return of Rs.8000 every month. If the first payment is made in the 5th year.
Calculate the present value at the rate of 12% compounded monthly? 345607.26
Q20 Mr Dawood pays Rs.2,000 at the end of every month towards his provident fund account from his
salary. If the rate of the interest is 9% compounded monthly , find the total amount credited in his
provident fund account at the end of 20 years ? 1335773.7
Q21 The present value of a simple perpetuity of Rs.20000 payable at the end of each quarter if the rate
of interest is 4% compounded quarterly? 2000000
Q22 The present value of Rs.4000 a year at the rate of 9% compounded annually is? 44444.44
Q23 Calculate the IRR of the project
Year Cash flow
0 (28 Lac)
1 3 Lac
2 2 Lac
3 26.5 Lac
Q24 Calculate the IRR of the project
Year Cash flow
0 (10m)
1 2m
2 10.4m
3 1.7m
Permal Sajjad(APFA,ACFMA) Page 3
Quantitative Methods Chapter 6
Q25 Find the IRR of an investment having initial cash outflow of [Link] cash inflows during
the first, second, third and fourth years are expected to be Rs.85000, Rs.65400, Rs.97600 and
Rs.95400 respectively?
Q26 The following information is about a project.
Year Rs.
0 (200,000)
1 60,000
2 55,000
3 50,000
4 55,000
Calculate the NPV of the project @ 4.1% (to nearest Rs.)
Q27 A company is considering whether to invest in a new item of equipment costing Rs.90000 to
make a new product. The product would have a four-year life, and the estimated cash profits
over the four-year period are as follows.
Years 1 2 3 4
34000 12500 30000 8000
What would be the NPV of the project? If interest rate is 14 % p.a compounded yearly (approximately)
Q28 The following information is about a project.
Year Rs.
0 (750,000)
1 180,000
2 350,000
3 250,000
4 355,000
Calculate the NPV of the project @ 12.1% (to nearest Rs.)
Q29 Two companies made profits/ cash flows from equal investments in different projects:
Years 1 2 3 4
Company X 125 million 85 million 165 million
Company Y 95 million 90 million 78 million 87 million
At what rate of interest both companies NPV would be equal?
Q30 Two companies made profits/ cash flows from equal investments in different projects:
Years 1 2 3 4
Company X 135 million 84 million 152 million
Company Y 116 million 94 million 60 million 120 million
At what rate of interest both companies NPV would be equal?
Permal Sajjad(APFA,ACFMA) Page 4