Module 3: Time value of money and related concepts
Solution for practice questions (3 and 5 marks)
Question #01
Suppose you gets a loan of Rs. 500,000 at 12% simple interest rate for 10 years from a
bank. What will be total interest you will pay to bank and what will be the total payable
amount? 3 marks
Solution
Simple Interest=P×i×n
Simple Interest= 500,000*0.12*10
Amount of Simple Interest= Rs. 600,000
Total amount = Rs 500000+ Rs. 600000 = Rs. 1100000
Question #02
What will be the present value of Rs. 10,000 to be received after 5 years, if interest rat is
12% compounded semi-annually. 3 marks
Solution:
PV = FV / (1 + r/n)n*t
where n = number of compounding period per time period
t= the time period
PV = 10000 / (1 + 0.12/2)2*5
PV = 10000 / (1.06)10
PV = 10000/ 1.79
PV = Rs. 5,586.59
Question #03
What will be present value of Rs. 70,000 to be received after 4 years. Assume an interest
rate of 10% compounded monthly. 3 marks
PV = FV / (1 + r/n) n*t
PV =70000 / (1 + 10/12)12*4
PV = 70000 / (1.0083)48
PV = 70000/ 1.49
PV = Rs. 46,979.87
Question #04
What will be the Future value of Rs. 10,000 after 5 years, if interest rat is 12%
compounded quarterly. 3 marks
Solution:
FV = PV*(1 + r/n)n*t
FV = 10000 *(1 + 0.12/4)4*5
FV = 10000 * (1.03)20
FV = 10000 * 1.81
FV = Rs. 18,100
Question #05
(5 marks)
Calculate and compare present values of following two investment plans and decide
which will be feasible for you and why?
Plan A: Rs. 50,000 to be received after 10 years, if interest rat is 10% compounded
semi-annually.
Plan A: Rs. 50,000 to be received after 10 years, if interest rat is 10% compounded
annually.
Solution:
Plan A
PV = FV/(1 + i/n)n*t
PV = 50000/(1 + 0.10/2)2*10
PV = 50000/2.65
PV = Rs. 18,867.92
Plan B
PV = FV/(1 + i)t
PV = 50000/(1.10) 10
PV = 50000/2.59
PV = Rs. 19,305.01
Plan B is more suitable because present value is more than plan A.
Question #06
Calculate Present Value of the following series of cash flows if discount rate is 15%.
5 marks
Year Cash flow (Rs.)
1 100,000
2 -70,000
3 250,000
4 -180,000
PV = CF1/(1+r)1 + CF2/(1+r)2+ CF3/(1+r)3 + CF4/(1+r)4
PV=100000/(1.15) -70000/(1.15)2 +250000/(1.15)3 -180000/(1.15)4
PV=100000/1.15 -70000/1.3225+250000/1.520875-180000/1.749
PV= 86956.52 -52930.05671+ 164379.0581-102915.5842
PV= Rs. 95489.93
Question #07
Option1: Deposit Rs. 500,000 today at 10% annual rate compounded semi-annually.
Option 2: Deposit Rs. 350,000 today at 12% rate compounded annually.
Required:
a) Calculate the future value of both options if investment is made for 5 years. 4 marks
b) Which option will you prefer and why? 1 mark
Solution:
Option 1
FV = PV (1 + i/n)n*t
FV = 500000*(1+0.10/2)2*5
FV = 500000*1.63
FV = Rs. 814,447.3
Option 2
FV = 350000*(1+0.12)5
FV = 350,000*(1.76)
FV =Rs. 616,819.58
Option 1 is preferable because its future value is higher than option 2
Question #08
What will be future value of an ordinary annuity if annual payment is Rs. 5000 for 10 years at
an annual interest rate of 8%.
3 marks
FV = R*[(1+r)^n - 1]/r
FV = 5000*[(1.08)^10 - 1]/0.08
FV = 5000*[14.49]
FV = Rs. 72,432.81
Question #09
What will be future value of annuity due if annual payment is Rs. 8000 for 5 years at an
annual interest rate of 10%.
3 marks
FV = R*[(1+r)^n - 1]/r *(1+r)
FV = 8000*[(1.10)^5 - 1]/0.10 *(1.10)
FV = 8000*[6.72]
FV = Rs. 53,724.88
Question #10
Calculate the present value of an ordinary annuity if:
Annual payment: Rs. 3000
Number of years: 10
Interest rate: 15% per annum
PV = R x [1-(1+r)-n ] /r
PV = 3000 x [1-(1.15)-10] /0.15
PV = 3000 x 5.02
PV = Rs. 15,060
Question #11
Calculate the present value of an annuity due if:
Annual payment: Rs. 3500
Number of years: 5
Interest rate: 10% per annum
PV = R[1-(1+r)-n+1]/r + R
PV = 3500[1-(1.10)-5+1]/.10 + 3500
PV = 3500[0.317]/0.10 + 3500
PV = Rs. 14,595
Question #12
What will be present value of a perpetuity of Rs. 2000 per year at 12% annual interest rate?
3 marks
PV = R/r
PV = 2000/.12
PV = Rs. 16,666.66