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Time Value of Money Exercises

The document is a worksheet focused on the time value of money, containing various financial problems related to savings, investments, annuities, and present value calculations. It includes scenarios involving different interest rates, compounding periods, and cash flows over time. The exercises aim to enhance understanding of financial management concepts through practical applications.

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shruti Jain
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26 views2 pages

Time Value of Money Exercises

The document is a worksheet focused on the time value of money, containing various financial problems related to savings, investments, annuities, and present value calculations. It includes scenarios involving different interest rates, compounding periods, and cash flows over time. The exercises aim to enhance understanding of financial management concepts through practical applications.

Uploaded by

shruti Jain
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Financial Management Computer Practical

WORKSHEET 1 : TIME VALUE OF MONEY

1. Mr. X places his savings of ₹1,000 in a two-year time deposit scheme of a bank which
yields 6 per cent interest compounded quarterly. Make a comparison of Mr. X’s savings
at the end of two years when interest rate is compounded annually, half-yearly and
quarterly.
2. Ram deposits ₹55,650 in a bank, which was paying a 15 per cent rate of interest on a
ten-year time deposit, how much would the deposit grow at the end of ten years?
3. Suppose Mr. X deposits each year ₹500, ₹1,000, ₹1,500, ₹2,000 and ₹2,500 in his
savings bank account for 5 years. The interest rate is 5 per cent and compounding time
period is one year. Payment is made at the end of each year. Mr. X wishes to find the
future value of his deposits at the end of the 5th year.
4. Suppose a firm deposits ₹5,000 at the end of each year for four years at 6 per cent rate
of interest. How much would this annuity accumulate at the end of the fourth year?
5. Company XYZ is establishing a sinking fund to retire ₹5,00,000, 8 per cent debentures,
10 years from today. The company plans to put a fixed amount into the fund each year
for 10 years. The first payment will be made at the end of the current year. The
company anticipates that the funds will earn 6 per cent a year. What equal annual
contributions must be made to accumulate ₹5,00,000, 10 years from now?
6. Suppose an investor wants to find out the present value of ₹50,000 to be received after
15 years. The interest rate is 9 per cent.
7. The ABC company expects to receive ₹1,00,000 for a period of 10 years from a new
project it has just undertaken. Assuming a 10 per cent rate of interest, how much would
be the present value of this annuity?
8. Mr. X wishes to find out the present value of investments which yield ₹500 in
perpetuity, discounted at 5 per cent.
9. Mr. X plans to invest ₹10,000 today for a period of four years. If the interest rate is 10
per cent, how much income per year should he receive to recover the investment?
10. A limited company borrows from a commercial bank ₹10,00,000 at 12 per cent rate of
interest to be paid in equal annual end-of-year instalments. What would the size of
instalments be? Assume the repayment period is 5 years.
11. Suppose your friend has agreed to return your money in 4 consecutive instalments of
Rs, 1,000, 2000, 3000 and 3500. He will pay these instalments after 1, 2, 3 and 4 years
respectively from today. You want to know the present value of these cash flows, in
order to understand how much he has actually paid in current terms. Consider interest
rate as 10 per cent.
12. If an investor has an opportunity of receiving ₹1,000, ₹1500, ₹800, ₹1100 and ₹400
respectively at the end of one through five years. Find out the present value of this
stream of uneven cash flows, if the investor’s required interest rate is 8 per cent.
13. A company paid a dividend of ₹60 last year. The dividend stream commencing from year
one is expected to grow at 10 per cent per annum for 15 years and then end. If the
discount rate is 21 per cent, what is the present value of the expected series?
14. Mr. X borrows ₹70,000 from HDFC to buy a flat. He is required to mortgage the flat and
pay ₹11,396.93 annually for a period of 15 years. What interest rate would he be
paying?
15. Mr. X wishes to determine the rate of growth of the following stream of dividends he
has received from a company:

Year Dividend (per share)


1 ₹2.50
2 2.6
3 2.74
4 2.88
5 3.04

16. Using two-way data table, create the following tables in Excel for period ranging from 1
to 10 and rate from 1% to 10%

1. Factors for Compounded Value of a Given Amount i.e., CVF(r%,n)


2. Factors for Compounded Value of an Annuity i.e., CVAF(r%,n)
3. Factors for Present Value of a Future Amount i.e., PVF(r%,n)
4. Factors for Present Value of a Future Annuity i.e., PVAF(r%,n)

Common questions

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The interest rate can be determined using the amortization formula for annuities: A = P * (r(1 + r)^n) / ((1 + r)^n - 1), where A is the annual payment, P is the principal, r is the rate, and n is the number of periods. This involves solving for r, which typically requires iterative methods or financial software due to the complexity of rearranging the formula algebraically. Given the exact parameters and payments, the interest rate is approximately 9% .

The present value can be calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of years. Substituting the values, PV = ₹50,000 / (1 + 0.09)^15. Thus, the present value is approximately ₹12,380.21 .

The annual contribution required is calculated using the sinking fund formula A = FV / (((1 + r)^n - 1) / r), where FV is the future value, r is the interest rate per period, and n is the number of periods. Substituting the values, A = ₹5,00,000 / (((1 + 0.06)^10 - 1) / 0.06). The required annual contribution is approximately ₹40,603.38 .

The present value of an annuity is calculated using the formula PV = PMT * (1 - (1 + r)^-n) / r, where PMT is the annuity payment, r is the discount rate, and n is the number of periods. Applying the values, PV = ₹1,00,000 * (1 - (1 + 0.10)^-10) / 0.10. The present value is approximately ₹6,14,456.62 .

To determine the annual income required to recover the investment at the given interest rate, we use the future value annuity formula: P = PMT * (((1 + r)^n - 1) / r). Here, we solve for PMT. Rearranging gives PMT = P / (((1 + r)^n - 1) / r). Substituting, PMT = ₹10,000 / (((1 + 0.10)^4 - 1) / 0.10). Therefore, Mr. X should receive approximately ₹2,534.46 annually .

The frequency of compounding affects the future value by increasing the amount of interest accrued over time. When interest is compounded annually, the future value is calculated as FV = P(1+r)^n, where P is the principal, r is the rate, and n is the number of years. For compounding half-yearly, the formula becomes FV = P(1+(r/2))^(2n) because interest is compounded twice a year at half the annual rate. For quarterly compounding, it is FV = P(1+(r/4))^(4n) because interest is compounded four times at one-fourth the annual rate. Thus, more frequent compounding results in a slightly higher future value due to the effect of earning interest on accumulated interest more frequently .

The present value of each cash flow is calculated individually using PV = FV / (1 + r)^n for each year, where FV is the cash flow, r is the discount rate, and n is the year. The total present value is the sum of these individual present values: PV1 = 1000 / (1.1)^1, PV2 = 2000 / (1.1)^2, PV3 = 3000 / (1.1)^3, PV4 = 3500 / (1.1)^4. Summing them gives the total present value of approximately ₹8,235.06 .

The future value of an investment compounded annually is calculated using the formula FV = P(1 + r)^n, where P is the principal, r is the annual interest rate, and n is the number of years. Substituting the values, FV = ₹55,650 * (1 + 0.15)^10. Therefore, the future value is approximately ₹2,26,035.17 .

The present value of a perpetuity is calculated using the formula PV = C / r, where C is the cash flow per period and r is the discount rate. Therefore, PV = ₹500 / 0.05, giving a present value of ₹10,000 .

The growth rate (g) can be calculated using the compound annual growth rate (CAGR) formula: g = (Ending Value/Beginning Value)^(1/n) - 1. For dividends where the Ending Value is ₹3.04, Beginning Value is ₹2.50, and n is 5, g = (3.04/2.50)^(1/5) - 1, equating to an approximate growth rate of 4.01% .

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