Exercises (Time value of money)

1. Chandane is planning for his retirement. He is 45 years old today, and would like to have Rs.
300,000 when he attains the age of 60. He intends to deposit a constant amount of money at 12
per cent each year in the public Bank to achieve his objective. How much money should
Chandane invest at the end of each year, for the next 15 years, to obtain Rs 300,000 at the end of
that period?
2. Ms. Punam is interested in a fixed annual income. She is offered three possible annuities. If she
could earn 8 per cent on her money elsewhere, which of the following alternatives, if any, would
she choose? Why? (i) Pay Rs 80,000 now in order to receive Rs 14,000 at the end of each year for
the next 10 years. (ii) Pay Rs 150,000 now in order to receive Rs 14,000 at the end of each year
for the next 20 years. (iii) Pay Rs 120,000 now in order to receive Rs 14,000 at the end of each
year for the next 15 years.

3. You have come across the following investment opportunity: Rs 2,000 at the end of each year
for the first 5 years plus Rs 3,000 at the end of each year from years 6 through 9 plus Rs 5,000 at
the end of each year from years 10 through 15.
(a) How much will you be willing to pay for this investment if the required rate of return is 14%?
(b) What will be your answer if payments are received at the beginning of each year?

4. If the nominal rate of interest is 12 per cent per annum, calculate the effective rate of interest
when a sum is compounded (a) annually, (b) semi-annually (c) quarterly, and (d) monthly.

5. Determine the present value of the cash inflows of Rs. 3000 at the end of each year for
next four years and Rs. 7000 and Rs. 1000 respectively, at the end of years 5 and 6. The
appropriate discount rate is 14%.

6. Nimal is borrowing Rs. 500,000 to buy a low-income group house. If he pays equal
installments for 25 years and 4% interest on outstanding balance, what is the amount of
installment? What shall be amount of installment if quarterly payments are required to be
made?
7. AB Ltd. is creating a sinking fund to redeem its preference capital of Rs. 5 million
issued on 06th November, 2013 and maturing 05th November, 2025. The first annual
payment will be made on 06th November, 2013. The company will make equal annual
payments and expects that the fund will earn 12% per year. How much will be the
amount of sinking fund payment?

8. You are offered an investment that will pay you Rs. 2000 in one year. Rs. 4000 in two
years, Rs.6000 in three years, and Rs.8000 in four years. You can earn 12% on very
similar investments. What is the most you should pay for this one?

9. You are offered an investment that will make three Rs. 5000 payments. The first
payment will occur four years from today. The second will occur in five years, the third
will follow in six years. If you can earn 11%, what is the most this investment is worth
today? What is the future value of the cash flows?
10. You plan to make a series of deposits in an interest-bearing account. You will deposit
Rs. 1000 today, Rs. 2000 in two years, and Rs.8000 in five years. If you withdraw Rs.
3000 in three years and Rs. 5000 in seven years, how much will you have after eight
years if the interest rate is 9%? What is the present value of these cash flows?

11. Suppose you borrow Rs. 100,000. You are going to repay the loan by making equal
annual payments for five years. The interest rate on the loan is 14%per year. Prepare an
amortization schedule for the loan. How much interest will you pay over the life of the
loan?

12. You have recently finished your MBA at the University of Colombo. Therefore, you
decided to purchase a new BMW immediately. The car costs about Rs. 8 million. The
bank quotes an interest rate of 15% annual percentage rate for a 72-month loan with a
10% down payment. You plan on trading the car in for a new one in two years. What will
your monthly payment be? What is the effective interest rate on the loan? What will be
the loan balance be when you trade the car in?